Using Life Insurance to Help with College Funding
Help Your Clients Gain Financial Protection & Help with College Costs
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The primary purpose of life insurance is to provide a death benefit to beneficiaries. It can be designed to meet your clients' changing needs with features such as a flexible death benefit and flexible premiums. Death benefit protection can make life insurance an attractive choice for establishing a self-completing plan to help fund a college education. Permanent life insurance that can accumulate cash value may be used to help pay for college costs.
- Those with a need for life insurance protection.
- Young families with children up to 13 years old.
- People concerned about college tuition costs.
- Those who are possibly looking to help supplement income in retirement years.
- The life insurance coverage should be on the primary breadwinner. One strategy is to aim for the lowest death benefit possible that meets the client's needs and still provides ample funding for college should death occur before the first child enters college.
- Since the policy can help to supplement retirement income, the client may want to keep the death benefit low for the longest period of time possible. Use the guideline premium test (GPT), keeping in mind that the death benefit may be higher in the early years, but lower for a longer number of years because the death benefit can exceed corridor quickly with the cash value accumulation test (CVAT).
- Illustrate both variable interest rate loans1 and zero cost loans.2 It's impossible to forecast what the interest rate environment will be in the future. Planning for both scenarios can increase your credibility with the client and can provide reasonable expectations.
- You can set up the illustration as a defined benefit (a specific college cost) or a defined contribution plan (a specific premium payment).
- Determine whether to pay for annual college bills or to repay student loans. The older the child, the more beneficial it can be to repay student loans, as this provides more time for the potential cash value to grow. Be mindful of the timing at which each child will enter/exit college.
- Determine whether to continue funding the policy after the college period is over. This decision depends upon the client's retirement goals.
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1. The net cost of a variable interest loan rate could be negative if the credits earned are greater than the interest charged. The net cost of the loan could also be larger than under standard policy loans if the amount credited is less than the interest charged. In the extreme example, the amount credited could be zero and the net cost of the loan would equal the interest rate charged on variable interest loans (which has a maximum, typically of 10%). In brief, Variable Interest Rate Loans have more uncertainty in both the interest rate charged and the interest rate credited.
2. Zero Cost Loans are loans charged and credited at the same percentage for a net zero cost. The policy year and amount available vary by product. Please refer to the specific product marketing guide or contact the marketing department for details.
The primary purpose of life insurance is to provide a death benefit to beneficiaries. Because of the uncertainty surrounding all funding options except savings, it is critical to encourage your clients to make personal savings the cornerstone of your clients' college funding program. However, even a well-conceived savings plan can be vulnerable. Should your clients die prematurely, their savings plan could come to an abrupt end. To protect against this unexpected event, life insurance may be the only vehicle that can help assure the completion of a funding plan. In addition to the financial protection aspect of insurance, the tax-deferred buildup of cash values can be part of your clients' college savings plan. Generally, if the policy is not a Modified Endowment Contract then tax-free withdrawals can be made up to the contract's cost basis. Moreover, if the policy is not a Modified Endowment Contract, then loans in excess of the cost basis are also tax free as long as the policy remains in force.
Indexed universal life products are not an investment in the "market" or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance.
FOR AGENT USE ONLY. NOT TO BE USED FOR CONSUMER SOLICITATION PURPOSES.