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Life insurance, annuities provide smart strategies to send grandchildren to college

by Joseph Arroyo | Contributor
July 30, 2020

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Many grandparents want to provide a college education for their grandchildren. Though it's a worthy goal, finding the right strategy can be challenging. In this article, we’ll review some options for using guaranteed products like life insurance and annuities to achieve your college savings goals.

What are my choices for a college savings fund for my grandchildren?

There are many options available for establishing a college savings fund. These can range from simple to complex. For instance, if you have a large enough estate, you might simply designate a certain amount to college expenses in your will and living trust instructions.

Others, who may not have such large estates, may choose to use one of several savings vehicles to provide cash for their grandchildren’s college education. In this article, we’ll review the uses of these three funding methods:

  • Life insurance
  • Annuities
  • Endowment policies

We’ll also compare the benefits and features of these financial instruments to 529 college savings accounts, which are the other main alternative.

Life insurance for college savings

Moving flip book of Understanding life insurance book  offer.

Life insurance offers several ways to build up a college fund for your children. The two main tactics here are:

  • Make your family trust the beneficiary of a life insurance policy and specify that these funds are to be used for college
  • Withdraw or borrow funds from an insurance policy and use them to help pay for your grandkid's college

You can see that these are two opposite strategies: One only works after you’ve passed away, and the other is used while you’re still living. In either case, the type of life insurance you choose is very important. You’ll want to avoid term life insurance, and instead choose a permanent policy. Select a policy that builds cash value like:

  • Whole life insurance
  • Indexed universal life insurance
  • Variable universal life insurance (rarely)

These insurance policies combine a death benefit, literally the amount your beneficiaries get if you die, with a savings account. Part of your premium accumulates in your savings account, and grows over time. You can take loans or withdrawals from these cash values, and they can be used in any way, like paying for college. Most importantly, these policies will stay in force as long as you want, or need them to.

Annuities for college savings

Annuities can also be used in a couple of ways. First of all, if you’re not drawing income from an annuity, you can name a grandchild as beneficiary, and upon your death the full value of the annuity will pass to them. If you’re worried about the money not being used wisely, you can name a trust as beneficiary, and dictate that some or all of the annuity is to be used for college.

An alternative would be to “annuitize” an annuity, which means to draw monthly payments from it. You can designate your grandchild as beneficiary of these payments. You would fund the annuity with enough money to pay the stream of income you want them to have access to during their college years.

Annuities can be funded in a number of ways. You can make one or more large deposits to them, perhaps as a part of your overall estate plan. For instance, if you need $50,000 in an annuity to provide the income needed for your grandchild, you might just move that amount of money from other investment accounts.

You can also fund annuities over time. So you could make contributions over several or many years. In this way, you can accumulate the amount that wish to designate for college education.

Endowment policies for college savings

Another insurance product that can be used for help pay for your grandchildren’s education is an endowment policy. This is similar to a permanent life insurance policy in that your premium payments are split between life insurance protection and a cash accumulation account.

The difference is that the endowment contract will pay a designated amount after a designated number of years. So, the endowment will pay out to your beneficiary at the set time, even if you’re still alive, which can be a benefit over traditional life insurance. If you make the required premiums payments, the endowment is guaranteed to pay the lump sum benefit spelled out in the contract.

529 college savings plans

COINS SAVED IN A CANNING JAR

529 college savings plans are also an option for setting up a college fund for your grandchildren. These savings plans are administered by the 50 individual states. Each one has its own nuances. However, each state’s plan is managed by an investment advisory firm. Some of the benefits of 529 plans include:

  • Ability to make almost unlimited contributions
  • Exposure to the stock market and the potential for higher growth
  • Relatively low fees
  • Ability to move money from one 529 plan to another

529 plans have some disadvantages, though. These can include:

  • They may lose value if invested in the market
  • They are inflexible – they must be used for college expenses
  • You cannot change the investments more than twice in a year

Probably the worst aspect of 529 plans is that they must be used for college expenses. If your grandchild never goes to college, or receives a scholarship, your 529 balance is not usable. If you withdraw it for other uses, you’ll pay a 10% excise tax.

If you use one of the insurance-based tools for college savings, you preserve much more flexibility. These funds can be used for any purpose. If you’ve designated a trust as a beneficiary, you can also include contingent instructions allowing the trustee to disperse the funds for other purposes if any of your grandchildren don’t attend college or receive scholarships.

Since one of the benefits of 529 plans is market exposure, allowing for potentially higher growth, you must also accept increased risk, too. If the markets decline, the balance of your 529 account will shrink as well. You can lose principal, not just interest. You may not attain the balance you were targeting. 529 funds are managed by investment managers, so if they underperform, your savings will, too.

With the insurance-based options, you’ll have peace of mind that your principal is protected from losses. Also, if you utilize indexed annuities or life insurance, you can have access to market growth, but stay protected from market losses.

College funding as part of your overall estate plan

It’s important to make sure your retirement and estate planning professionals know you want to help fund your grandchildren’s college expenses. Make sure you discuss the use of insurance products with them. These financial tools can have high expenses over the short term, so it’s important to be fully committed to their use before you buy them. When used in the right way, insurance and annuities can be a great way to save for your grandchildren’s college.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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