A few months ago I had a discussion with a friend of mine, whom I'll call Bob, who was concerned 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?
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!