The cost of a college education is steep…and on the rise. According to the Institute of Education Sciences, the 2010-2011 academic year cost about $13,600 at public schools, with private institutions averaging between $23,500 and $36,300. In the past decade, prices for an undergraduate education at a public college or university (including tuition, room, and board) have gone up 42 percent.
The options for payment aren’t promising, either. The average college graduate in 2011 emerged with $26,600 of debt, according to the nonprofit American Student Assistance. If you’re a conscientious parent, you probably don’t want your student starting his or her adult life with enough debt to stifle their well-being. But neither can you afford to sacrifice your own retirement savings. Where is the happy medium?
Permanent life insurance may provide the surprising answer to this problem.
Cash Value: A Versatile Financial Asset
Permanent life insurance provides two specific benefits that term life insurance does not: cash value, and a guaranteed death benefit. Every permanent life insurance account contains cash value, funded with a portion of each premium payment you make. This is why permanent policies cost more than term policies.
Your cash value grows tax-deferred over time, either via a set rate of interest or through a tie to a particular market index. Different policies offer different growth options; you get to choose the kind you want when you select your policy. It’s a little like an enforced savings account—it costs a little more now, but you’ll be glad later, when that cash value helps pull you through a financial rough spot.
You can withdraw any amount from your cash value, tax-free, up to the current total value of your premium payments. This works best when you buy your policy at a young age and let that cash value grow for years. By the time your child heads for the Ivy League, you’ll have a deep fund to pull from.
Best of all, your cash value does not count against you in terms of the asset and income calculations on the FAFSA (Free Application for Federal Student Aid). Life insurance is one of the few financial products exempted from the list of assets you have to count when applying for federal student aid. Life insurance carrier AXA Equitable presents the full list of excluded assets: retirement accounts, home equity, annuities, and cash value life insurance.
Guaranteed Death Benefit: Delayed Gratification
The guaranteed death benefit is another reason permanent life insurance can work better than financial savings plans for college (such as a Coverdell or 529 plan). No one wants to think about the worst-case scenario: passing away before your child attends college. But it happens. And if it does, who is going to contribute to your child’s college fund? Can your now-single spouse afford to pay all the bills, raise the children, and contribute to a retirement or savings account?
Life insurance is what’s known as a “self-fulfilling” product. In other words, it’s going to pay out. There’s no question about that—as long as you make your payments and keep the policy in force, that is. You have to buy the policy with a commitment to keep it for at least 10 years. It takes that long to allow the cash value to grow into something really useful. If you surrender your policy before that time, you’re essentially wasting your dollars.
Making the Decision: Is Life Insurance Right for You?
If you make the commitment, permanent life insurance can be as (or more) financially rewarding than a traditional retirement account. You have the cash value you can use in your lifetime. It grows tax-deferred, just like a retirement account or other educational savings accounts. Plus, you have a guaranteed death benefit that will provide for your family if the worst happens.
Many families do both—pull from cash value to send a child to college, renovate a dream home, start a small business, or just supplement their existing retirement funds. Then, when the insured passes away, there’s still a death benefit that can make sure the dreams and goals of their loved ones don’t fade away due to financial worry.
License: Creative Commons
License: Creative Commons image source
Jenni Wiltz writes about life insurance, health, and family for Trusted Quote.