Why Save For College Using Life
Insurance?
You've heard the horror stories. The cost of college tuition is outpacing inflation each
year at alarming rates. According to the College Board's Trends in College Pricing, 1998,
since 1980-81 tuition for both public and private four-year colleges increased an average
more than 100 percent over inflation. The four-year cost of tuition will likely range into
the tens to hundreds of thousands of dollars in ten years. However, there is one problem
with such facts--rather than focusing on the solution, they position college education
funding as an insurmountable challenge. Fortunately, there are many solutions, or funding
vehicles, that allow you to address college education funding. While identifying funding
vehicles is simple, choosing between them is more complex. Let's take a look at one viable
alternative--life insurance.
In general, a successful college education funding vehicle should help you accomplish
multiple goals and provide tax benefits. Life insurance satisfies each of these criteria.
Characterized by the ability to address numerous goals and by preferential tax treatment,
life insurance is also the only vehicle that is self-completing--providing the money
needed should you die before your children get through college. The merits of using life
insurance for college education funding warrant further discussion.
How Life Insurance Works
Life insurance can offer both cash value and death benefits. Cash value, available through
many life insurance products, is a sum of money inside the life insurance policy which can
be accessed for college needs through a loan or surrender (subject to interest or
transaction charges.) Life insurance also provides a lump sum benefit to your
beneficiaries upon death.
Accomplishing Multiple Goals
There are seldom instances in which you have only one priority to address. You
may need to provide for your child's education, meet retirement goals, address unexpected
expenses, and protect your mortgage all at the same time. Life insurance can satisfy each
situation. The ability to accomplish all these goals through one product is attractive to
many savers.
Providing Tax Benefits
The tax-deferred growth of life insurance cash value is particularly dramatic
when compared with taxable returns over time. For instance, if you invested $10,000 and
earned 8 percent on a tax-deferred basis for 20 years, your investment would be worth
$46,610. Under the same scenario, you would amass $30,650 if you were in the 28 percent
bracket and earned 8 percent on a taxable basis. The tax benefits don't end here. Life
insurance allows you to take tax-free surrenders from the cash value until they exceed the
total premiums paid. For instance, say you've paid $12,000 into a life insurance policy to
date and your policy's cash value has grown to $24,000. You can take up to $12,000
tax-free out of the policy and use it for any purpose, including education. In addition,
if you need to access more than the total premiums paid, policy loans are an alternative
since the amount loaned is non-taxable. However, consult with your insurance professional
or tax advisor when considering a surrender or policy loan, as such actions can affect
policy values and benefits. Surrenders may incur surrender or transaction charges; policy
loans accrue loan interest.
Overcoming Uncontrollable Circumstances
If saving $100,000 for college during a 15-year period seems unrealistic, imagine
trying to create this sum in half the time. Should you die before accumulating the funds
you need, life insurance provides tax-free death benefits--literally insuring that college
accumulation goals are met. No other product can offer this benefit.
What if you become disabled? In addition to a loss of earnings, you may experience the
financial strain of medical bills. Either could prevent you from paying your life
insurance premiums and force losing your life insurance coverage. Plus, if you were
relying on the cash value for college funding, the policy might lapse before the cash
value is adequate to meet your needs. To solve this dilemma, a rider can be added at the
time of purchase to pay life insurance premiums for you during a disability*. Your
coverage stays intact and the cash value continues to grow, with no out-of-pocket cost
while you're disabled.
