Starting to fund a permanent life insurance policy when the kids are in middle school or younger is “a complete no-brainer,” she said, “provided the permanent policy is properly designed.” At that stage, parents have many years to build cash value before they’ll need to borrow the funds to fund college.
Permanent life policies can still be an attractive way to help parents whose kids are in high school manage cash flow challenges, she said, but at that point the policy will likely be earmarked for retirement.
One of her client families bought a house at the height of the real estate market but has no equity in it because property values subsequently crashed, she said. The parents—highly compensated with good jobs and maxed out on their 401(k) contributions—haven’t been able to save much for college for their two children who are now in middle school.
According to Walker, the couple is starting to set aside $1,500 a month for college costs through a permanent life insurance policy. The couple will be able to borrow $30,000 a year from the policy and she has factored in a 4% annual inflation increase during the years the clients’ children will be in college. “The rest they’ll have to get through student loans and merit-based scholarships,” she said. The clients plan to repay the loan to their policy by the time they retire.
When Walker comes across clients who inherit money upon the death of their parents, she often encourages them to put the inheritance into a permanent life insurance policy instead of taking a distribution that could disqualify the grandchildren from receiving financial aid.
Cash value life insurance isn’t the college funding answer for everyone with cash-flow challenges, said Walker, noting, “A confident practitioner would need to run scenarios.”
She cautioned that permanent life insurance is a long-term commitment that shouldn’t be taken lightly. “You really have to spend time educating parents,” she said. Consumers often don’t know enough to ask the right questions, she said, and even people with a license to sell insurance also may not be educated on how it can be used to fund college.
“Because it’s a complex tool, with a lot of moving parts, “ said Walker, including yearly fees and one-time fees, “you have to really understand what you’re doing.”