College Funding


College costs are continually rising and each year more and more of my clients are looking for creative ways to afford the kind of education they want their children to have – without leaving them with tens of thousands of dollars in high interest student loans.  Even though a child could likely qualify for some type of financial aid including grants and scholarships or some type of work program, a large portion of the college tuition may still fall on the student’s and parent’s shoulders. An Indexed Universal Life insurance policy (IUL) can be a great way for parents to help pay for a child’s college education.

Why is the IUL such an attractive option? To understand what makes the IUL work for college savings, you first have to understand what an IUL is. The IUL is a permanent life insurance policy—meaning that the coverage will be in place as long as the policy holder lives and continues to pay the life insurance premium. A portion of the IUL is secured as a death benefit that will not change while a remaining portion is invested in an interest bearing account that can grow in cash value.

Typically, an IUL has an interest rate guarantee. This means that even if the index the insurer invests in performs poorly, the cash value portion of the policy will receive the minimum guaranteed interest rate. There are several different types of IUL policies including variable and fixed options. The cash value account can be used to pay for living expenses or used as funding for things such as a child’s college education.

Here are three reasons you may want to consider an IUL for education expenses:

  • Tax Advantages: The cash value portion of the IUL is tax-deferred as long as the policy stays funded. There are also instances when policy withdrawals from an IUL policy may be considered tax-free. If a withdrawal is made only on the money that is contributed to the cash value, then the withdrawal should be considered tax free. Loan distributions taken out on a cash value policy are also usually tax-free. However, the loan must be paid back over time or the death benefit will be reduced by the balance of the loan due.
  • Low Risk: An IUL may be used to pay for college expenses without taking away from the death benefit. A portion of the policy premium payment is going toward the cash value and another portion pays toward the death benefit part of your policy. The cash value will continue to earn a guaranteed minimum even if the index does not earn as expected. Your clients can have some peace of mind in not having to worry about market volatility.
  • Financial Aid: When the financial aid advisor determines the amount of financial aid to be awarded, assets will be calculated into that figure. The good news about the IUL is that life insurance normally is not counted as an asset in this calculation and won’t count against the assets in the analysis of determining the amount of financial aid received.

The cost of a college education is not going to be decreasing. In all likelihood, the cost of secondary education could continue to rise. The IUL works best toward college savings when looked at over the long-term. The idea is to allow the cash account to grow over the long-term and avoid withdrawing cash until the funds are needed to help pay for college. There may be a minimum cash balance requirement on an IUL that must be maintained to keep the policy in force. This will vary depending on the insurer. Overall, the IUL can be a great option to consider when looking at college funding options.