The financial burden of a college education is a source of stress for many families. According to CollegeData.com, tertiary education in private institutions would cost approximately $39,400 for the upcoming school year. This rough estimation doesn’t include other supplemental expenses an average college student would incur.
With tuition and other expenses increasing each year, finding a way to fund college without taking on substantial debt can be challenging. One option that may help you support your child’s college education is an Indexed Universal Life (IUL) policy.
In this blog post, we’ll discuss the possibility of funding a college education using IULs and other necessary information.
What Is an Indexed Universal Life Policy?
Before understanding how to fund college education with IULs, you must understand this type of policy.
An Indexed Universal Policy is a type of life insurance policy that allows the insured to build wealth while securing their dependents at their death. The IUL life insurance comprises two components: the cash value portion and the death benefit portion.
The cash value portion of an IUL plan earns interest, which is linked to the performance of an index, i.e., the S&P 500. This could be either a stock market index or a fixed index annuity, and interest rate gains can range from zero to whatever the cap rate is set at.
The death benefit portion of an IUL plan is funded by payments made by the insured for a predetermined amount of time. These premiums go towards the accumulation of cash in the policy, which is used to pay out a lump sum when the insured passes away.
Is It Possible to Fund College Education Through an Indexed Universal Life Policy?
Yes, it is possible! As mentioned, the IUL policy is permanent life insurance with two parts: the cash value portion and the death benefit portion. The cash value can be used to cover college tuition costs on a tax-advantaged basis as long as specific qualifications are met.
First, you must ensure the policy has attained the required cash value before making any withdrawals or policy loans. When you reach this specific amount, you can start taking tax-deferred withdrawals or policy loans and use that money to fund your or your child’s college education.
Although you can withdraw money from your policy, taking advantage of policy loans is more common. This allows your money to remain invested and it can continue to grow tax-deferred. Once you or your child graduates from college, you can use your IUL policy to fund your retirement.
Why Should You Consider IUL for College Planning?
IULs offer countless advantages when it comes to college planning. Here are a few reasons why you should consider using IULs to fund your child’s education.
As shown earlier, you can take out tax-deferred withdrawals or policy loans as long as the required cash value has been met. This means you won’t have to pay taxes on the money you are using to fund your child’s college education, offering substantial tax savings in the long run.
Lower Investment Risks
One of the best things about IULs is that your money is protected against market fluctuations. This means you don’t have to worry about the stock market crashing and taking away all your savings. Although the interest you gain from IULs relies on market performance, you don’t face significant investment risks because there’s a guaranteed minimum return rate.
IULs are more aggressive than fixed life insurance policies, which offer a guaranteed return rate. However, it’s less risky than variable universal life insurance, which heavily relies on market performance. This means it can leave you without savings if the stock market performs poorly.
Finally, saving through an IUL policy won’t affect your eligibility for financial aid. Unlike other investments such as stocks, bonds, or mutual funds, IULs are not counted as part of your estate when assessing the amount of money you may receive in financial aid. This is because the money in an IUL policy is protected from creditors and can’t be taken away from you.
529 Vs. IUL?: Which One Is Better for Your College Education?
A 529 is another popular option for college planning. 529 plans are tax-advantaged saving plans meant to provide financial assistance for college tuition, housing, books, computers, and other higher education costs. Unlike IULs, 529 plans are limited to qualified education expenses only.
Primarily, there are two types of 529 plans: education savings plans and prepaid tuition plans. In education savings plans, contributions are invested in mutual funds and bonds. The money you put in this investment grows on a tax-deferred basis, and you can use it for qualified higher education expenses. Education savings plans are more common than prepaid tuition plans.
On the other hand, prepaid tuition plans allow you to purchase future college tuition credits at today’s rate. Unlike the former plan, this plan only applies to higher or tertiary education. Additionally, this plan does not cover other college expenses such as boarding, textbooks, and computers.
When choosing between 529 plans and IULs for college planning, the decision ultimately depends on your financial situation. If you’re looking for more flexibility when using the money for a college education, IULs may be better for you. However, if you’re looking to save money for college tuition only, 529s offer more tax-advantaged options compared to IULs.
Can I Lose Money Using an IUL for College Planning?
If done right, you won’t have to worry about losing money when you use your IUL policy to fund a college education. That said, there are still certain risks involved in investing in IULs.
First and foremost, there is the risk of a policy lapse. A policy lapse occurs when you cannot keep up with the premiums required by your IUL policy. To avoid this situation, it’s essential to read through all the terms and conditions before signing up for an IUL policy to ensure you understand how much you need to pay and when your payments are due.
Secondly, there is the risk of surrender charges. Surrender charges are fees incurred when you end your policy before its maturity date. This means it’s crucial to plan and commit to paying the premiums required by your policy.
Lastly, IULs are subject to market performance. As such, the returns you earn may be lower or higher than expected, depending on how well the stock market performs. Considering these factors is vital before investing in an IUL policy and ensuring that it suits your financial needs.
IUL policies offer a guaranteed minimum return rate which protects you from losing money if the market performs poorly.
A college education provides you with the necessary skills and knowledge for a successful career. Unfortunately, for many people, college can be expensive. To help fund your child’s future education expenses, you can pay for college with an IUL, which offers a practical and flexible way of building up your savings.
IULs come with certain risks, so it’s essential to ensure that you understand the details of your policy before signing up. Additionally, there are other options for college planning, such as 529 plans. Ultimately, the decision between these two depends on your financial situation and needs.
Regardless of which option you choose for college planning, staying committed and disciplined in your savings journey is critical. With proper planning, you can help your child pursue the education they need to have a successful future.
If you want to explore more savings options for your or your children’s college education, you can speak with our Safe Wealth Agents today. Schedule your consultation now and start planning for your child’s future.