College Planning for Kindergartners

David O’Malley

By David O’Malley | September 22, 2015

You’ve just watched your first born get on the bus for that first day of kindergarten, and you wondered, what will the future hold for them?

It’s never too early to start planning for college, or too late. Believe me, kids grow up fast. If you’re a parent of a child going off to kindergarten, here is what you need to know for planning for financing college.

The first step is to figure out how much you will need. According to The College Board®, the average cost of four years at a private college today is $134,600 and that of a state school is $39,400. Of course, there is also inflation to consider, as college costs have increased five percent annually over the past 10 years. For today’s kindergartner, that private college education might cost over a quarter million dollars!

Once you know the cost, you can determine how much you need to save to afford college. There are some good college financial planning tools on the Penn Mutual website that parents can use to model how much to save, or, more realistically, if what they can afford to save will get them close to covering the cost. This is basic planning: How much money do you need, and how much time do you have left to fund it?

Once you have decided how much you need to save, you have your choice of different savings vehicles. For example, you can put the money in a bank savings account, a stock/brokerage account, a 529 college savings plan, or a permanent life insurance policy, like whole life or Indexed Universal Life (IUL). Things to keep in mind in making the right choice of savings vehicle include:

Return. It’s not enough just to save the money — you also want the money to grow.

Volatility of Return. Historically, the stock market has offered good long-term returns, but anything invested in the stock market is likely to have its ups and downs. You get a better rate of return, but your principle is also at risk. An IUL policy allows you to capture some of the upside of being invested in the stock market while offering a guaranteed return even when the market is down.

Tax Consequences. The returns in savings or brokerage accounts are taxable, which reduces the money available for college. The earnings in college savings plans are not taxable, provided they are used for a qualifying post-secondary education. Withdrawals from the cash value of a permanent insurance policy can also be tax-free.

Cash-value permanent life insurance is a compelling alternative to other college savings vehicles. It offers a good return, and it’s stable. There’s liquidity, because it doesn’t have to be used for a specific need, and loans from its cash value are generally tax-free, unlike a traditional CD, plus you have the flexibility to use the cash value for whatever you want. If your child ends up getting a full-ride scholarship to college, your money’s not trapped in a college savings plan that can only be used for post-secondary education.

The cost of a permanent life insurance on a child is relatively inexpensive, because the mortality is low. Plus, you have something you can gift to them later, as a graduation present, if you end up not needing the money for college. Another big benefit is you also lock in their insurability when they are young and healthy.

Of course, the question becomes how to determine how much insurance to get. To me, the important question to ask is, “What premium can you afford?” It’s important to note that there needs to be a relationship between the amount of coverage on you and the amount on your child. In addition, some states have legal limitations on the amount of coverage that can be procured on a child, which your financial advisor can help you with.

The strategy of using the cash value of a permanent insurance policy to finance college might not be right for your particular circumstance. You should talk to your financial advisor on making the right choice of strategy in saving for your child’s college education.

Life insurance policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values. Loans are income tax free as long as policy is not a “modified endowment contract” (MEC) and policy must not be surrendered, lapsed, or otherwise terminated during the lifetime of the insured. Policy must not be a modified endowment contract (MEC) and withdrawals must not exceed cost basis. Partial withdrawals during the first 15 policy years are subject to additional rules and may be taxable. Excess policy loans can result in termination of a policy. A policy that lapses or is surrendered can potentially result in tax consequences. You should consult a qualified tax professional for tax advice on your own personal situation. All guarantees are based upon the claims-paying ability of the issuer.

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