Using Life Insurance for College Funding

Using Life Insurance for College Funding

Life Insurance can be designed to meet your clients’ changing needs using features such as flexible death benefits and flexible premiums. In addition, Life Insurance can also be designed to help establish and grow a college education fund.

Using features, such as death benefit protection, can create a self-completing plan to contribute to a education fund and Permanent Life policies can accumlulate cash value to pay for tuition costs as well.

The clients who typically would benefit most from this type of planning are:

  • Those with a need for life insurance protection.
  • Young families with children up to 13 years old.
  • People concerned about college tuition costs.
  • Those who are possibly looking to help supplement income in retirement years.

When Using Life Insurance To Establish A College Fund:

  • The life insurance coverage should be on the primary breadwinner. Aim for the lowest death benefit possible that meets the client’s needs and still provides ample funding for college should death occur before the first child enters college.
  • Since the policy can help to supplement retirement income, the client may want to keep the death benefit low for the longest period of time possible. Using the correct premium test could result in stronger cash values. Many carriers provide the option to choose the Guideline Premium Test (GPT) vs the Cash Value Accumulation Test (CVAT).
  • Illustrate both variable interest rate loans1 and zero cost loans.2 It’s impossible to forecast what the interest rate environment will be in the future. Planning for both scenarios can increase your credibility with the client and can provide reasonable expectations.
  • You can set up the illustration as a defined benefit (a specific college cost) or a defined contribution plan (a specific premium payment).
  • Determine whether to pay for annual college bills or to repay student loans. The older the child, the more beneficial it is to repay student loans, as this provides more time for the cash value to grow. Be mindful of the timing at which each child will enter/exit college.
  • Determine whether to continue funding the policy after the college period is over. This decision depends upon the client’s retirement goals.
  • Illustrate realistic rates of return. Carriers have limitations on the rate of return that can be shown, but using a lower rate than illustrated can show integrity with the clients.

Male, Age 40, Preferred Non Smoker

$500 monthly premium, 6.00% hypothetical rate of return on Index strategy with an increasing DB option 2.

Age End Of Policy Year Total Cumulative Premium Outlay Accumulation Value Net Cash Value Death Benefits
41 1 $6,000 $4,882 $1,096 $155,449
45 5 $36,000 $27,471 $23,872 $178,038
50 10 $60,000 $64,111 $63,402 $214,678
55 15 $90,000 $120,913 $120,913 $271,480
60 20 $120,000 $199,238 $199,238 $349,805
65 25 $150,000 $307,001 $307,001 $457,568
70 30 $180,000 $453,877 $453,877 $604,444

For more information about this sales idea and how Life Insurance can be a crucial part of the planning process, contact your Life Sales Rep today.