As a parent you are probably concerned about funding the education of your child. You may have watched the recent commercials that promote these policies as the best way to save for college. According to SmartMoney magazine, the economic climate has provided the perfect opportunity to get parents to buy into life insurance policies.
Should you really use a life insurance policy to save for your child’s education? Honestly, it sounds like a great idea. For a couple of dollars a month, you are able to accomplish two things: save for your child’s education and protect them in case something happens. But do you really think it is that easy? Should you rely on insurance policies as the main source of funding for your child’s education?
No, despite the commercials, you should not fund your child’s education with a life insurance policy. You should be reluctant to follow the advice of those advocating insurance policies for college funding without consulting someone else. Take the time to consider whether a life insurance policy is really the best way to save for your child’s education.
The Potential Benefits
While I do not recommend this method of funding as the source for your child’s education savings, there are some benefits. The potential benefits are usually those usually used by financial institutions to draw you in. They include tax benefits and the ability to borrow against the policy.
Money that is used for the life insurance policy will receive a favorable tax treatment. While this treatment can be beneficial, a life insurance policy is not the only way to get favorable tax treatment. For instance, a 529, which will be discussed later, is one of the best ways to get tax favored treatment in the United States.
If you have a life insurance policy you are able to borrow against the policy for a very low interest rate. While this rate is lower than traditional loans that a child may receive in college, it is not low enough to outweigh the disadvantages.
It is also pretty easy to borrow against a life insurance policy. If you borrow from the policy, there will not be any credit checks. This is particularly advantageous for those that do not have good credit.
There are significant disadvantages to using a life insurance policy as a source of income for your child’s college education. The disadvantages include high costs, uncertainty, and a lack of interest or return.
A life insurance policy is very expensive. Although you may be given a guarantee of a certain payment amount, the amount that you are guaranteed is probably going to be a lot lower than the amount that you would receive if you invested the money in another way.
How expensive can the policies be? These policies usually cost 75% more than a policy that just covers life insurance (in this case a term life insurance policy). This higher cost probably includes the higher commission that agents are paid for enrolling people into this policy. If a parent really wanted to the benefits of life insurance, it would be significantly cheaper to buy a term insurance policy.
Although many agents will guarantee a certain amount of payment for their policies, parents can never be certain that they will receive that amount. When you have a life insurance policy, there are various pitfalls that can be used to deny the benefit. For instance, you may not receive the payout if you miss a payment, even if you make all other payments. Additionally, you run the risk that the company may not be around at the time that your child receives the benefit. Although the insurance company may be popular now, you cannot be sure that the company will be around in later years. If the company is not around in later years, you could lose your premium payments, the benefits that you expected, and the amount of time that you spent paying those premiums.
Lack of Interest/Return
When you invest for your child’s education, you want to make sure that you are utilizing your funds to the best of your ability. When you use a life insurance policy, you are not really getting your money’s worth. While the return on a savings account may be minimal now, if you save for a couple of years you can look forward to a higher return in a savings account (of course this is based on the amount of interest that your account pays). When you buy a life insurance policy, you are not guaranteed interest. Most policies do not offer interest because the benefit that the life insurance company is giving you is the potential life benefit.
The Best Way
When parents are planning to set up college funds for their children, they really need to consider a 529 plan. There is a variety of information available online that you can use to help understand the basics of the plan. The main benefit of this plan is that it has an entirely tax free benefit if the money is used for college (and other requirements are followed). As a parent you can choose a plan in any state but you want to consider the tax benefits of using one in your state. If you need more information you should consult a financial planner.
After reading this article you should understand that using a life insurance policy is one of the worst ways that you can save for a college education. The best method that you can use is getting a 529 plan. It will provide you with tax benefits. Due to the rules surrounding a 529 plan, you will also have a better opportunity to ensure that you get the best return. Remember, life insurance policies were not designed as a savings vehicle, they were designed to replace an individual’s income. Since you know the purpose of the life insurance plan, do not get tricked into using one to fund your child’s education. When planning for your child’s education, do your own research and make sure that you consult a financial planner.