If you have children, you likely have some of the same hopes and dreams as other parents. You want your children to be happy and safe. You’d like for them to have strong friendships and be confident in themselves. And you likely want them to get a great education so they can have a successful career and financial stability.
Unfortunately, the rising cost of college has made it difficult for many parents to afford the kind of education they want for their children. According to a recent study, the average annual costs for “moderate budget” public and private schools in the United States are currently $24,061 and $47,831, respectively.
Those prices are expected to rise in the future. Experts estimate the cost of tuition, room and board, fees, and books to increase by an average of 5 percent annually well into the future. At that rate of inflation, the average annual cost of college is expected to be $40,935 in 2030. The average private school is expected to cost $90,576 annually.2
Of course, you’re not on your own to cover these costs. Your child may qualify for some form of financial aid, such as scholarships, loans, work-study programs, and grants. However, many families still have to pay out-of-pocket even with a generous financial aid package.
Faced with this reality, you may be examining various savings vehicles to help you prepare for your child’s education. The 529 plan is one of the most popular options because of its tax advantages. However, 529 plans are also strictly designed for educational use. You may want something with more flexibility.
One option is something called indexed universal life insurance, or IUL. Life insurance may not seem like an obvious choice as a college savings vehicle. However, they offer some unique benefits that could make them right for your goals. Here are a few reasons to consider IUL to save for your child’s education:
Limited Downside Risk
In an IUL policy, you have a death benefit, but you also have a cash value account inside the policy. When you pay your premium, a portion goes toward the cost of insurance and another portion goes toward the cash value account.
Every year, your cash value could earn interest based on the performance of an underlying index, like the S&P 500. If the index does well, your interest rate will be higher. If the index performs poorly, you may receive less interest.
In an IUL, though, your cash value will never go down due to poor index performance. You get upside potential based on market returns, but you avoid downside market volatility.
Your cash value grows tax-deferred as long as the funds stay inside the IUL policy. There are also ways to take distributions from the policy in a tax-free manner. One way is to simply withdraw your policy basis. Your basis is the money that you contributed to the cash value. You can always withdraw basis tax-free.
Another option is to take distributions as a loan. When you take a loan, the distribution is tax-free, but you do have to pay back the loan over time. If you don’t pay the loan back, the balance will likely be deducted from the death benefit when you pass away.
Either way, you have the option to take distributions tax-free when you’re ready to pay for your child’s education. Also, after your child finishes school, you can continue funding the policy to use as a retirement funding source in the future.
Financial Aid Benefits
One of the challenges with saving for college is that the assets are often factored into financial aid calculations. The more assets you have, the more your family is expected to contribute toward the costs of college. That usually means a reduced financial aid package.
However, life insurance isn’t included in financial aid analysis. That means you can use an IUL policy as a college funding vehicle without concern for how it will impact financial aid.
Ready to develop your college savings plan? Let’s talk about it. Contact us to learn more. We welcome the opportunity to help you analyze your needs and goals and develop a strategy. Let’s connect soon.
This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
16163 - 2016/10/18
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