An Overlooked College Funding Source

College Funding Service
November 2016

While college costs continue to increase, funding a college education is a bigger-than-ever expense for most families.  Even if you’re counting on grants and scholarships to help cover college costs, or perhaps a 529 plan, there may be a need for additional funding.  There is an option to help fill this gap that many people overlook – a cash value life insurance policy.

Typically, people purchase life insurance to provide a death benefit for their loved ones.  However, cash value life insurance allows for the opportunity to build cash value, which can be accessed through policy loans or withdrawals for anything you choose – including supplementing a college funding strategy. 

With fixed index universal life insurance (FIUL), your policy will earn interest based on the positive performance of an external index but will NEVER DECREASE due to market volatility. (It’s important to note that your policy does not directly participate in the market.)  So in other words, you have the opportunity to participate in market upturns but not downturns – this is a great feature when saving for college, because market losses can devastate a family’s saving-for-college plan.  Because of the short time horizon in saving for college (18 years, at best) there simply isn’t time to recover from drastic market losses.

3 tax benefits associated with FIUL

  1. Income-tax-free death benefit to your beneficiaries,

  2. Tax deferred cash accumulation, and

  3. Income-tax-free policy loans or withdrawals for college and retirement, or whatever else you choose. 

While it’s always smart to look for ways to help reduce your tax liability, with today’s economic and political atmosphere, it makes even better sense to do so. 

Here’s how it works for college funding

You take an “indexed loan” against your policy for an annual up-front interest charge that’s locked in when you purchase your policy.  Your policy will continue to earn indexed interest on both the un-loaned AND loaned values – meaning the annual loan interest charge can be offset by the potential credited indexed interest. You use the money to help cover college expenses – then you have the option to repay the loan – or not. 

Either way, the policy continues to earn indexed interest and the cash value continues to grow.  Then, in retirement, parents can again access the cash value in the form of a TAX-FREE income stream.  This makes FIUL a great strategy for both college AND retirement, and an ideal alternative for those families who are over the income threshold for Roth contributions.   

Be sure to consult Everett Wealth Solutions, Inc. - as we are qualified to help you.  Design is critical in minimizing potential income tax, gift tax, and estate tax consequences.  Keep in mind that most life insurance contracts will require health and in some cases, financial underwriting.