Now that you have kids, it’s time to start planning financially for their higher education. The cost of one year of tuition, fees, and room and board at a four-year university in 2016-17 averaged about $20,0001 – and that’s for a public, in-state option! The price tag is especially daunting if viewed through the lens of an unexpected loss in the family. Fortunately, a life insurance policy can be a good option to help ensure that children are able to finance their education should the family breadwinner(s) pass away. This checklist can help you determine how to incorporate life insurance into your plans so you have one less worry about your children heading off to school.
1. Take inventory
Look at your household’s entire financial picture to make sure you’re saving enough and covering bigger risks. What’s your monthly mortgage payment? Do you have car payments? How about daycare or preschool fees, or private school tuition? Calculate your net savings – but be realistic – and consider whether you can increase what you save. Make a list and check it twice. There are plenty of online worksheets to help get you started.
2. Choose the product
Parents should know that a key advantage of term life insurance over permanent (or whole) is the large amount of coverage they can obtain for a specific period of time for a relatively lower cost. A term policy may be the more affordable choice for most families seeking to safeguard a child’s higher education costs. However, a strong benefit of permanent life insurance is that it can build cash value in a tax–deferred way and provides coverage for a lifetime.
3. Consider the advantages over 529 plans
You’ve most likely heard of a 529 plan, which is an education savings investment account similar to an IRA but for college costs. Like an IRA, you can invest in a range of different types of investments, including mutual funds. However, if the funds aren’t used for education expenses, you’ll have to pay tax on what the 529 has earned plus possibly a 10 percent penalty on withdrawals. You won’t face this problem with a permanent life insurance policy, which has the added benefit of generally not being factored into calculations that determine financial aid.
4. Open the lines of communication
Start discussions with your children early, and work with them to investigate their colleges of choice. Sure, it might be many years down the road, but it can’t hurt to get a ballpark figure for tuitions at the schools on your short list. Keep in mind that the figures you’ll find online are often full price, and any scholarships, grants, etc., will be savings factors to weave into your calculations when your child is actually applying.
1 Trends in College Pricing 2016, College Board, 2016.
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