From generation to generation, Americans have taken pride in educating their children. Today, that’s a more expensive proposition than ever. In fact, college costs have risen faster than most other prices in our economy. Five, ten, or fifteen years from now, sending a child to college will likely test your financial resources. Yet, there is good news, too. Many of today’s financial products offer ways that you can potentially keep pace with rising college costs – if you start now.
You may be familiar with traditional college tax-saving strategies, such as a 529 plan or an UGMA/UTMA account, but I want to tell you about another strategy that more and more parents are utilizing these days. It is the use of Permanent Life Insurance to fund a child’s future college education.
When people think of life insurance they typically think of a monetary sum that only gets paid out upon death. In addition to the death benefit, though, permanent, cash-value life insurance can provide living benefits as well. You can access the cash value portion during your lifetime – even for college funding via policy withdrawals and loans.* Like a 529 plan, the asset grows tax-deferred and gets distributed income tax-free.
There are two ways to set up the policy – with either the parent or the child as the insured. There are benefits to each approach. As a parent, the plan is self-completing; meaning if the parent dies before the child reaches college age, then the death benefit is able to pay for the child’s education. However, if the child is the insured, the premiums will be considerably less and the minor has guaranteed insurability (i.e., he or she has a permanent insurance policy in place for the rest of his or her lifetime).
Permanent life insurance is exactly that: it is permanent, provided premiums are paid, so whatever is left in the policy can be utilized for future purchases – e.g., a wedding, retirement – and eventually gets passed on to the next generation. Generally, it is regarded as one of the most tax-advantaged vehicles for preserving and transferring wealth.
Therefore, if you are looking for a strategy to fund your children’s college education, as well as their financial future when you are no longer here, then investing in permanent, cash-value life insurance is an effective, tax-preferred way to reach those goals.
* Loans against your policy accrue interest and decrease the death benefit and cash value by the amount of the outstanding loan and interest.
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Adam W. Slocum is a Financial Services Professional** with New York Life and NYLIFE Securities LLC. Mr. Slocum works with families and small business owners to help them protect and plan for their financial future. He graduated from Amherst College and earned his MBA from the NYU Stern School of Business. He worked in development roles with several start-up firms before joining New York Life in 2011. He lives in Manhattan with his wife, Taryn, and five-year old son, Andrew.
** Registered Representative for NYLIFE Securities LLC (Member FINRA/SIPC), A Licensed Insurance Agency.
The term “strategy” when used within this piece does not imply that a recommendation has been made to implement a financial planning concept. Nor is it intended to be specific legal, accounting or tax advice. Consult your tax and/or legal adviser before implementing any tax or legal strategies
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