How Can I Use Life Insurance To Fund College Tuition Costs? 2023

During a discussion with a friend of mine, whom I'll call Bob, we talked about paying for his child's education costs if and when he went off to college. Bob had been divorced a couple of years and his son was in first grade at the time of our conversation. 

Bob has his own business and does pretty well financially, but he isn't a millionaire by any stretch of the imagination. He told me that he hoped that his son would get some sort of scholarships down the road, but due to his above average income, the child probably wouldn't be eligible for any financial aid when the time came. I agreed with him on this point. 

One of the first things we did was run an estimate* of how much a four year college would cost 12 years out. When I say "estimate", it truly is just that, because there are so many variables like the following:

• Will the child go to a public or private college?
• Will the school be in state or out of state?
• What if the child decides to get an associates degree at a 2-year school?
• What if the child doesn't go to school at all?
  
  
  

These are important things to think about because of the nature of our current college savings plans. Most of these plans, like the 529 or Coverdell plans, give tax breaks for setting aside money for college. And as most things that are "tax related" go, there is going to be plenty of paperwork and documentation involved. That means Bob and his child would have to disclose any college savings plans and the amount of cash accrued inside those plans. 

During this discussion I asked Bob if he had any life insurance, which he did. He had a term life policy that covered the mortgage on his house and his ex-wife was the beneficiary due to the court determining this at the time of their divorce. 

This is when I brought up using life insurance as a college savings plan. The reason I like to consider this is because it takes care of two problems at once. First, Bob needed additional life insurance as his term policy was not enough cover the cost of college for his son if he were to die too soon. Secondly, the cash value inside the policy would not need to be disclosed on any financial aid applications.

He agreed to look at some numbers. We had planned on taking money out of the policy during his son's freshman year, but a phone call gave us another strategy. My friend at the insurance company suggested a strategy where Bob's son apply for college loans. Since the loans wouldn't be due until he graduated, he could pay them back then with little to no interest in full. By waiting until the child was out of college to repay the loans, the cash value would have an additional four years to build cash value. 

Because Bob was healthy and an non-smoker, he was able to get more "bang for his buck" out of the policy. After some consideration, Bob and I agreed that the best way forward was to use an indexed universal life insurance plan, as a whole life plan would cost more and not build cash value as quickly. 

Another reason we liked the plan was that if the child, for some reason, didn't need the money, Bob could use the cash value to supplement his own retirement or take advantage of the living benefits** if he were to become chronically ill. 

If you have questions regarding using life insurance while you are living, drop us a note. In the meantime, please stay healthy!

*There are many calculators out there that can help you estimate the future costs of your child's education. We recommend this one.

**Living benefits are not available on all plans but were included at no extra charge in this case.

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life, disability, long term care, cancer, accident and other insurance coverages in North Carolina, South Carolina, Virginia, Tennessee and Georgia. He's also is a professional speaker helping sales people be more productive and efficient, and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog! 

Wouldn't You Rather Spend Your Savings On Something Fun?

I recently had a conversation with a very nice couple from Greensboro, NC. They both worked as realtors, had three children and seemed like they were doing a good job executing their financial game plan. 

As the housing market has been doing well, they have managed to sell more in the last year. They both know that things won't stay this way forever, so they put aside a good amount of money each month for their "rainy day fund". Having the discipline to this and stick to it is rare to find these days, so I told them they were doing an awesome job. 

We continued to discuss their other financial issues. They had a decent amount of life insurance on themselves (they probably could have used a bit more) and had started a retirement account  as well. This was especially encouraging because it can be a difficult task when one, or in this case both, of the spouses are self-employed. Nobody is deducting money from their paycheck for them. 

I was starting to think they didn't need me at all. However, it didn't take long to discover there was one potential landmine that needed to be addressed. I asked them a basic question. "Do you have enough money put aside to help pay bills if you are sick or hurt and can't work?" 

They thought about it for a minute and said, "Well, we could dip into our savings." 

"You're right. You can do that. But is that what you are saving for? To cover bills?"

They hadn't considered this so I offered a better alternative. "If you couldn't work, you wouldn't have that income. Sure, one of you could pick up some of the slack, but do you want to go through that? Your savings should be for things you want down the road, like a vacation or to buy a nice car. No one saves to pay bills."

"Let's do this," I suggested. "Let's take a look at disability insurance. The premiums won't break your budget but it could keep you from having to go through your savings." 

They agreed to look at a few options. As we move through the process I'm sure they will both complete applications. And since they are both fairly young and healthy, they should both have policies to protect their paychecks soon. 

Are you setting money aside each month for a rainy day or something fun like a vacation or a boat? Do you really want to have to dip into that money to cover your bills? What if you could shift that risk to an insurance company and let them cover your bills? 

If you are a business owner, a contract employee or otherwise self-employed, ask an agent to help you find a disability policy that fits your needs. 

Special Offer: If you aren't sure how much disability you need, we have a one-page PDF that can help. To get a FREE copy drop a note to chris@surffinancialbrokers.com and we'll send it to you ASAP. 

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life, disability, long term care, cancer, accident and other insurance coverages in North Carolina, South Carolina, Virginia, Tennessee and Georgia. He's also is a professional speaker helping sales people be more productive and efficient, and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!

Can Employees Get Tax Breaks?

Since it is tax season I thought I would share a few ways that you can use and maximize your insurance to help lessen or avoid a big tax bill over the next few posts. Some of these ideas may be implemented immediately, while others will help you down the road. Like a wise man once said, "If you fail to plan, then plan to fail."

First and foremost, I have to give the obligatory disclaimer that I am not a tax expert and one should consult their own tax advisor before implementing any of these strategies. Remember that tax laws are constantly fluid and can change as political parties rotate in and out of Congress.

Also, I want to let you know in advance that not all of these plans will work for everyone, but hopefully there will be a nugget or two in here for everyone. With that said, let's get started.

For those of us who work for an employer and are fortunate enough to have medical benefits, find out if those benefits are being "pre-taxed". Section 125 of the IRS tax code allows your allows employers to deduct your benefits from your pay before figuring out what your taxable income is. By simply moving your deductions "above the line" it can save you (and your employer) some money, with estimates around 20-25% on the costs of those benefits. The savings, in other words, come in the form of paying less taxes. And since your employer has to match your FICA* (Social Security) portion of the deduction, that can be decreased for them as well. 

If you have an enrollment company or a worksite insurance company providing ancillary products like dental, vision, disability and other insurance products, odds are they can set up and handle the administration of a pre-tax plan. Many of these companies will do it at no charge for your employer if there is a minimum number of participants. 

Be aware of a couple of items though. First, life insurance can not be pre-taxed. Since life insurance proceeds are generally tax-free to begin with, the IRS is not going to allow pre-taxing. Also, certain benefits can be pre-taxed but really should not be. 

I have seen businesses where their disability insurance, for instance, was pre-taxed. When this is the case, there will be a huge problem if an employee needs to file a claim, as it will be taxed as income. As most disability policies pay around 60-65% of a person's gross income, having that partial pay be taxed can be a financial nightmare for a family struggling to pay their bills.

Other deductions that are not necessarily insurance products can be used for pre-tax savings as well. A 401(k) plan can help you out down the road for retirement and should be implemented if offered. These plans were created in the late 1970's as a way for employers to create a tax-advantaged savings account for their employees. Unfortunately many employers replaced pensions with these plans, mostly because it saved the businesses a lot of money. 

If your employer offers a 401(k) plan take advantage of it and the tax savings that come with it. But be aware that it is not a true "retirement plan" and is basically a "savings plan". By allowing the employee to allocate their money as they wish, it also exposes them to a lot of market risk. 

After the debacle at Enron years ago, laws were enacted to heavily regulate the 401(k) plans. And after the financial recession of 2008 many employers changed their plans or did away with them altogether. Do some research or ask your tax advisor what is best for you.

The next few posts will continue on the theme of insurance and taxes so stay tuned. In the meantime, please stay healthy!

*There is a downside to saving all of this money on taxes by using the Section 125 plan. By reducing your taxable income while working, it also reduces your FICA contribution. This, in turn, can reduce your the amount of your Social Security check when you are eligible to receive these benefits. If you are paying less in, plan to get less out.

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!