Paying for college costs a lot of money; anyone who has written a college tuition check might feel the familiar reaction of their knees buckling at the mere thought of writing it at the beginning of a new school year.
This brings me to a conversation I had with my father when I was in my late 30's and more open to a discussion about finances. My brother and I were fortunate that our higher education was paid for by our parents, but I was always curious about how they were able to pay for our education. Between my brother and I, there was a total of 7 years of payments, with one overlapping tuition year.
During this conversation, my parents told me they had used cash-value life insurance loans to pay for some of the tuition. I was quite shocked (not giving my parents enough credit) and impressed at the same time. With some duct tape, hard work, and sound financial guidance, college tuition was paid for.
What would have happened to mine and my brother's college education if my father were to pass away? I know now that it likely would have still been paid for since my father had life insurance coverage in force.
Let's revisit a question I posed earlier. How are you currently advising clients to use competing dollars to address saving for college and protecting their family against death? I am a strong advocate for incorporating life insurance into the process when it makes sense.
What are the merits of incorporating life insurance to help fund college tuition? There are many, but I would like to focus in on just two at the moment.
1.) Every carrier has published guidelines regarding income replacement, for financial underwriting purposes, also commonly known as "Human life value". For example, for a 45 year-old earning $100,000 in income, a typical carrier may approve a death benefit of up to $2M of death benefit protection. The insurance carriers see the importance of individuals earning power. I repeat — the insurance carriers are allowing someone to access these amounts based on published guidelines regarding their current income.
In my experience, I don't believe we value earning power nearly enough. It is essential to talk to your clients about their Human Life Value. Protecting them helps protect their family if something unfortunate were to happen.
How would you equate Human Life Value to funding the cost of college tuition? Which would have more financial impact on a family: not having saved enough to pay for a child's college or not having that earning power for the next 20 to 30 years? Start the life insurance conversation there and adjust accordingly.
2.) A properly structured and well-funded life insurance policy can help pay college tuition, and may even have funds left over to help provide supplemental income — all through the use of policy loans and withdrawals.1 There are many benefits of cash value life insurance:
- Death Benefit protection for the family upon premature death or natural course life later on.
- The cash value feature offers potential access to cash value while living.
- The policy owner has control of the policy's potential cash value.
- Should plans change, the cash value may be used for purposes other than college funding, generally without tax consequences.
It is important to stress the fact that your client is a great parent providing for a college education, but they do not have to miss out on the benefits either. They can be a little "selfish" and know that their life insurance contract can work to their advantage, too.
Plus, there's no guarantee that money saved for college will be used for college — kids change their minds a lot; I almost did! If your clients' children decide not to go to college or to pursue other paths along the way, the potential cash value of the policy can be used for other purposes.
Life insurance is a planning tool that I know has helped at least one family provide for their kids' college education — wink, wink. Thank you, Mom, and Dad.
Happy National College Savings and National Life Insurance Awareness Month! Make the most of the conversations with your clients during this time of year by downloading the DMI Life Insurance Portfolio Analysis.
1Policy loans and withdrawals will reduce policy cash values and death benefits and could cause the policy to lapse. Additional premium payments may be needed to keep the policy in force