On the same day a grandmother from Massachusetts contacted me to get some advice about which Whole Life insurance plan was best for her to get to pay for her grandchild to go to college. I had to tell her that Whole Life insurance may not be the best option.
The truth is that more kids forego college in order to start their careers than actually go. Although it is true that kids who go to college tend to earn more money during their career, it is also true that the majority of kids do not end up going to college. Many of those who start do not finish.
I went to a small university. There were only 2500 kids in my freshman orientation. When I graduated, 4 years later, only 666 of us remained. A few transferred to different schools. Most found that the college experience was not right for them. They just dropped out.
Those who do attend college have to be able to pay for it. With any luck, your child will make the most of his talents and earn a full scholarship. The problem is that you cannot count on that happening.
When I went to college, a young adult could still work at a full-time job and go to school full-time. Kids going to college today cannot do that. There is no way for them to take the classes they need to graduate in 4 years without some form of financial assistance.
Under certain circumstances it can be a legitimate strategy. If you are going to use life insurance to pay for your child’s college education, use the following guidelines.
Many parents wait until their child starts kindergarten to begin a college savings plan. By that time it is too late for Life insurance to work its magic. There are other savings vehicles that will work better.
It is unrealistic to think that you will gain enough money, even with the magic of life insurance, if you only spend $15 a month on a child’s whole life insurance policy. If all you are able to put aside for your child’s college is $15 a month, most life insurance policies are only going to give you enough money to help your child buy books for his freshman year.
I typically will not even consider helping someone set up a college savings plan with permanent life insurance unless they are able to pay at least $200 a month.
USE THE APPROPRIATE TYPE
There are two types of insurance plans that will allow you to save money on a tax-favored basis. If you are going to use life insurance, use either Whole Life or Universal Life.
INSURE THE PARENT
Many insurance agents will use emotion to convince you that you should insure the life of the child. When it comes time to plan for college, stop and use your brain. If the child dies and you have to use the insurance for funeral expenses, you will not need to pay for college.
However, if you die, the child may still want to attend college one day. If you place the insured on the parent, you can use the beneficiary designation to fund an educational account for that child. If he wants to go to college, the money will be there.
BUY THE DISABILITY WAIVER
Some insurance companies have a Disability Waiver that will continue to pay your premium while you are disabled and unable to earn an income. This option not only guarantees that you will not lose your life insurance. The disability waiver will guarantee that your target amount will be there whether you live, die or become disabled. Your only responsibility is to make your systematic premiums while you are healthy.
Just be aware that all Disability Waivers are not the same. Some only keep your life insurance in effect while you are disabled. Others will continue to credit your account with the full target premium.
The first type is just fine if all you are concerned about is the death benefit. However, if you are using your Life insurance plan to save for college, you will want to make certain that any Life insurance policy you buy offers a Disability Waiver that will not just guarantee your death benefit if you are laid up. You should find one that will continue to credit your policy with the full premium. That is the only way the cash value will continue to grow at the rate you want.
If you do not want the Disability Waiver, consider getting a separate Disability Income policy either through work or individually.
BEWARE OF TAX MINES
During your conversation with your life insurance agent, it is probable that you will be reminded of the tax benefits of life insurance. You will be told that the cash value inside the policy will grow in a tax-deferred manner and that you can access the money tax-free through a combination of withdrawals and policy loans.
Be advised that those tax benefits are conditioned on the policy ending in a death benefit. If you cancel the policy when your child goes to college, you remove all the tax benefits that come with life insurance. You will be required to pay taxes on the gain in the policy in the year it cancels.
If you are going to use life insurance to save for your child’s college, make certain that you will still need the life insurance after your child ends his college career.
Before any of my fellow insurance agents get too angry, I must admit that Life insurance can be used quite successfully as a college funding tool. I have seen it work. My point is that before you commit to it, you need to know how to make it work. If you don’t do it right, the one who will get the biggest benefit from your purchase will be the insurance agent who helps you.
If you are not going to take the time to understand how to properly use Life insurance to save for your child’s college expenses, you are probably better off with Term Life insurance. There are other financial vehicles that will do just fine. You can wait until you have had time to fully study and understand them. Just do not wait too long.
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