College Funding and Life Insurance

October 19, 2011 by  Filed under: Financial 

Whole of life insurance was once a popular way many people provided for their children to go to college, or to give them a bit of financial help when they were ready to leave the family home, to start a new life of their own. The practice has died out over the last 30 to 40 years as many people found there were other ways of investing that gave them a larger return on their money. Life insurance for investment purposes was therefore avoided as much of the money was used up in administration fees and agent’s commissions.

As the effects of the Global Financial Crisis (GFC) still linger and the stock market remains volatile, many people today are once again looking at whole life insurance as a means of saving money for the future. After all, the big advantage whole life insurance has over any other form of investing, is that once the child grows and is ready to branch out by themselves, he or she has a readymade life insurance policy they can take over, at an extremely low premium, because it has 18 or 20 years already behind it.

Whole Life Insurance Offers More Than Just Life Insurance

When the time arrives for your children to go to college there are many expenses to meet that you may not be in the position fund adequately. If the money is not readily available you will have to cut back somewhere else adversely affecting the lifestyle of the rest of the family. By taking out a whole of life insurance policy in your child’s name, but having yourself as the owner, you can ensure money is available at such a time. When the time arrives and the money is needed, you will have the choice of whether you want to borrow the money from the life insurance policy’s cash value or actually cash in the policy. The benefit of borrowing from the policy is that as the money grows you won’t be paying tax on it but if you withdraw the funds by surrendering the policy you will.

The Three Points That Make up a Life Insurance Policy

It is worth remembering there are three parties involved in such a life insurance policy; the insured person (in this case the child going to college), the owner (in this case yourself) and the beneficiary (in this case yourself). If you take out a whole life insurance policy on the child soon after he or she is born you will be able to buy quite a large cover for a very low premium because of the child’s young age. It is normal for you and your spouse to be made equal beneficiaries. As you continue to pay the premiums the investment component starts to build and the compounding interest builds even further as the interest itself grows. Present taxation laws exempt insurance policy earning from being taxed as long as the policy remains primarily for the purposes of life insurance.

Once the child reaches the age to go to college you, as the owners, have the choice of whether you want to surrender the policy and retrieve the cash value that it has accumulated over the years, or keep the policy in force and borrow the amount you need, at a very low interest rate, from the policy itself. If it happens that the child does not want to go to college you can use the money for some other purpose, or transfer the ownership of the policy over to your child.

Tax Free Interest Earnings

Whatever you choose to do the money will remain tax free as long as it remains a life insurance policy. Many people in the past have turned their backs on using whole life insurance policies for such a purpose arguing that the administration fees and commission charges reduce the investment component of the premium so much, that the resulting earnings are not sufficiently competitive with putting the same amount into a high yielding savings account. This remains true but a bank savings account will not afford you a life insurance cover that you can hand over to your child at some stage giving him or her big advantage in low ongoing premium costs. Bank account interest is also subjected to being taxed.

It Still Remains Primarily a Life Insurance Policy

Whole life insurance policy cash values take many years to accumulate into an amount of money worth withdrawing for any significant purpose such as a college education, but that is, after all, what life insurance is really all about, long term planning. If you can use the cash value for any worthwhile purpose along the way it is an added bonus. College costs for your children won’t arrive for about 18 years or so and by that time a considerable amount will have accumulated.

There are several types of whole life insurance such as universal, in which the cash value grows accordingly with the prevailing interest rate in the community at any given time; variable, which uses mutual funds for cash value and; traditional, which gives a guaranteed cash value. Whichever type you choose you will need to purchase a rather large policy to give it any real value by the time your child is due to go to college. This can be achieved however because, it is the child’s life that is the life being insured, meaning the premium cost will be very low, in fact, it will be at rock bottom.

This article was written by Will from Life Insurance Finder. Visit Life Insurance Finder to find the best life insurance to suit your lifestyle.

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