Question for the Money Doctors
Question submitted on May 29, 2014.
QuestionMy husband and I have met with a college funding advisor who has created a plan to help us pay for college. His advice seems contrary to what I've been reading about the suitability of whole-life insurance as a financial aid strategy, so I'm looking for another opinion.
Background: We have two children, 13 and 15, both excellent students and likely headed to private universities. My husband and I are both self-employed and together earn around $80,000 per year (gross), though our income fluctuates from year to year. Our house is valued at about $260,000, and we've paid off our mortgage. We have about $500,000 in retirement accounts, $70,000 in savings/investments, and no debt. Each of our boys has a $20,000 trust fund set up by their grandmother in WA state and a $20,000 UFund account (MA).
The plan: Our advisor wants us to take out a $100,000 mortgage or home-equity loan and to use that money—along with $40,000 from our savings and the $40,000 in the trust funds—to purchase whole-life insurance for both of us. Doing this, he says, would reduce our expected family contribution from $40,000 per year to $20,000 per year. We would use the UFunds to pay for each boy's first year of school, then borrow $20,000 from the insurance for each of the remaining years.
What is your opinion about this plan? Thank you for sharing your thoughts.
This is a challenging question not knowing all the facts and circumstances of your situation. However, you should have some healthy skepticism when a large whole life insurance policy is recommended by a "college funding advisor" to be heavily funded with borrowed money.
Considering you will need to start paying for college in the next 3-5 years, purchasing a whole life policy to fund college tuition does not seem to be a good idea. You will be paying large commissions that will eat up any earnings in the short-term. You might be better off opening and depositing existing funds into the 529 college savings account, assuming you are the owner and not their grandmother. If their grandmother owns the Ufund accounts then new 529s could be opened with you as the owner utilizing your existing funds/resources.
With a 529 account, you can make tax-free withdrawals, rather than borrowing against a life insurance policy for qualified higher education expenses (QHEE). Your state may also offer tax incentives to contribute to the 529 accounts and all earnings are tax free as well if used for QHEE. In addition, you would have the flexibility to change beneficiaries on the account should one of your children avoid or defer their matriculation, up to the age of 30.
Keep in mind the 529 savings plan is counted as a parental asset when calculating your Expected Family Contribution and will decrease financial aid not more than 5-6%. I recommend you get another opinion not based so heavily on an insurance product. www.findapfs.org is a good resource to identify a CPA, PFS in your area who can help.
For additional information visit http://www.360financialliteracy.org/