September is Life Insurance Awareness Month and a wealth advisor with a specialty in college planning wants more financial advisors and parents to understand how permanent life insurance policies (including whole life and indexed universal life) can help fund college expenses.
Beth Walker, a wealth advisor with Omaha-headquartered Carson Wealth Management and founder of the Center for College Solutions, a consulting firm in Colorado Springs, isn’t suggesting parents abandon 529 college savings plans for permanent life insurance contracts (also referred to as cash value contracts) but thinks the strategy deserves a closer look.
According to Walker, almost every permanent life insurance contract includes loan provisions that enable the policyholder to borrow on the cash value that has accumulated. A parent is typically the owner and the insured on policies used to fund college, she said.
The cash value of permanent life insurance contracts is unlikely to sabotage financial aid awards because it’s excluded from the Free Application for Federal Student Aid formula and only a handful of colleges that require the CSS Profile application inquire about the cash value of policies, said Walker.
In addition, policyholders can generally borrow up to 90% of the cash value of their life insurance contracts “with just the stroke of a pen,” she said, without having to qualify or have an appraisal. Both of those steps are required when collateralizing a home equity line of credit to pay for college, she added.
“The flexibility of an insurance line of credit is a phenomenal tool during the college years,” said Walker.
She also pointed out that the collateral in cash value contracts continues to compound uninterrupted when loans are taken and policyholders are permitted to repay the loans whenever they wish. Some parents wait until they receive a bonus or until their children graduate college, she said, and others may opt not to repay the loan. Outstanding loan balances are deducted from the payout beneficiaries receive following the death of the insured.
That being said, “I would never advocate that you don’t pay it back,” said Walker, noting there can be surrender charges and parents might need the payout to fund their retirement.
Putting Policies To Work
Walker has used cash value life insurance as a college funding strategy with more than 30 client families. She has also funded a life insurance policy to pay for her son’s college education.