Why Life Insurance Should Be Part of the Mix
The school year is almost over. Soon, summer break will be upon us and in a few short months, a new school year will begin. If you have kids, you know how quickly time flies. Before you know it, they’ll be graduates heading off for college.
College can bring exciting new opportunities, but it can also bring a hefty price tag. According to U.S. News and World Report, the average tuition for a public in-state school in 2018 was $9,716. The cost rose to $21,629 for public out-of-state schools and $35,676 for private colleges. ¹ Unfortunately, many students rely on loans to pay tuition. A report from the Institute for College Access and Success found that graduate leaves college with over $28,000 in student loan debt. ²
You can help your child reduce their need for student loans by saving for college today. There are a few different savings vehicles available. You can use a regular bank account or investment account. You could also use a 529 plan, which is a popular tax-advantaged savings vehicle.
You also may want to consider permanent life insurance. Life insurance may not be the first thing that comes to mind when you think of saving for college. However, life insurance can be a useful and valuable savings tool that offers unique benefits. Below are a few ways life insurance could play a role in your college savings strategy.
Most permanent life insurance policies have something called a “cash value account.” When you make a premium payment, a portion of the premium covers the cost of insurance, but another portion goes into the cash value account.
Your cash value account has the opportunity to grow each year. The way it grows depends on the type of policy. Whole life policies pay annual dividends, while universal life policies pay interest. Variable universal life policies allow you to participate in external markets and have some risk exposure. There are even indexed universal life policies that pay interest based on the returns of market indexes.
No matter which type of policy you choose, the growth is tax-deferred. As long as the funds stay inside the policy, you don’t pay taxes on growth. That could help your assets compound at a faster rate than they would in a taxable account.
You can grow assets tax-deferred inside a life insurance policy, but what about when it’s time to pay for college? There are a couple of ways to take funds out of a policy and avoid tax exposure.
The first way is through withdrawals. You can always withdraw your premiums tax-free. The second option is to take a loan from your cash value. With this option, you’re essentially taking a loan from yourself. The distribution is tax-free and you can use it however you like, including to pay for college. You have to repay the loan plus interest over time. If you pass away and the loan isn’t repaid, the balance is deducted from the death benefit.
As mentioned, there are a few different types of permanent life insurance and each has its own method for growth. The only policy that may have exposure to market risk is a variable universal life policy. All of the other types—whole, universal, and indexed universal—have downside protection. Your cash value may go up, but it will never go down due to market loss.
Risk protection is important in college planning. You need to grow your assets, but you also may not have time to recover from a substantial loss. The time horizon with college savings is much shorter than for retirement planning, so your risk tolerance is likely lower. Life insurance could help you achieve growth without taking unnecessary risk.
Ready to develop your college planning strategy? Let’s talk about it. Contact us today at Northern Plains Insurance & Financial. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.
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