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November 20, 2003 at 07:00 PM
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Rising costs of college tuition are making it increasingly hard for some boomers to pay for their childrens college education. Among saving options available, some advisors believe that using the cash value built up in life insurance policies can be a good way to pay these expenses.
The policyholder has the option of using the cash value built up in the policy to pay tuition. Or, if the boomer wants to ultimately re-establish the policys death benefit, he can take out a loan up to the amount of accumulated savings.
Raymond D. Loewe, a college advisor with Financial Resources Network, Marlton, N.J., notes that using life insurance to save for college has advantages and disadvantages.
Loewe says a life insurance policy allows a client to deposit after-tax premium payments, which grow tax-deferred and can be withdrawn tax-free to use for college or other uses.
Income tax regulations allow nontaxable withdrawals from life insurance contracts up to the total amount of premiums deposited, says Loewe. These are treated as tax-free recovery of principal.
In addition, the policy owner may borrow excess cash value from the contract at a low net rate of 0% to 1% annually.
Loewe often recommends variable life as a saving vehicle for grandparents who are fairly wealthy and want to fund college for a grandchild.
“As long as you have at least eight to 10 years to build up cash value, it works well,” Loewe says.
“If the kid is going to school in the next three years, its not worth it,” agrees Bard Malovany, a financial planner with Financial Council Inc., Annandale, Va. There are better vehicles, such as section 529 savings plans or borrowing against the parents 401(k) plan, for funding college for most people, he says.
Byron Udell, founder and CEO of AccuQuote, Wheeling, Ill., says if a client does want to use a life policy as an accumulation/investment vehicle for college, he needs to overfund it.
