How clients can supplement college funding using life insurance

Fixed index universal life insurance (FIUL) can be a valuable product for the middle market, especially when it comes to paying for college

College is expensive. It costs tens of thousands of dollars each year to attend a four-year college or university. And the costs continue to rise. Clients could incorporate a fixed index universal life (FIUL) policy into their college financing strategy to help pay for the cost of higher education.

While many people buy life insurance to provide their loved ones with a death benefit that is generally paid income-tax-free to beneficiaries, there are other ways the policies can be useful to clients. With the accumulation potential of FIUL insurance, the policy’s accumulation value has the potential to build over time. The cash value of the policy can be accessed through policy loans or withdrawals,1 which can be used to help pay for college tuition.

The 2022 Allianz Middle Market Study* found that many people in the middle market are worried about inaccessible savings. But those who already own a cash value life insurance policy were less likely to worry.

The 2022 Allianz Middle Market Study focused on people ages 25 to 45 who are contributing to their 401(k) plan to the full company match and have additional funds that could be put into another financial vehicle.

For example, while 41% of respondents without life insurance worry about having too much of their savings inaccessible for use in emergencies, just 33% of those with life insurance said the same. And, 50% of respondents without life insurance worry about finding financial products that provide access to funds, while allowing money to accumulate. Fewer Americans with life insurance (41%) said the same.

Using an FIUL policy to help pay for college has unique benefits compared to other funding sources for the middle market.

1

Tax advantages

FIUL as part of a college funding strategy has tax advantages. These policies offer a generally income-tax-free death benefit, tax-deferred accumulation potential, and income-tax-free loans and withdrawals. This benefits FIUL as part of a college funding strategy. The money in the policy has the opportunity to grow before taxes and take advantage of future compounding. What’s more – the loans or withdrawals taken for tuition are income-tax-free.

2

Flexibility and control

The policyholder has the flexibility and control to decide how to use FIUL. The available cash value as part of the policy can be accessed for any purpose. That means the funds are not earmarked for specific purposes like other financial products. So, while the funds could be used to pay for tuition, the funds do not have to be put toward college. This provides flexibility for clients whose children may not go to college.

3

No eligibility requirements

There aren’t eligibility requirements to use the cash value in an FIUL policy. And, at the same time, money received from policy loans generally will not affect a student’s eligibility for other financial aid. Withdrawals made from the cash value of an FIUL policy do not count as income.

4

Monitor policy values

Clients considering a loan strategy should carefully monitor their policy values to help prevent a policy lapse and potential tax consequences. Clients should consult with their tax advisor to discuss their specific situation.

FIUL policy loans or withdrawals can supplement a college funding strategy. Traditional funding options for a college financing strategy include 529 plans, Coverdell education accounts, and student loans.

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Learn about life insurance for the middle market

Understand how you can use life insurance as part of a financial strategy for clients in the middle market with these resources.

* The 2022 Allianz Middle Market Study was conducted by Allianz Life as an online survey in August 2022 with 800 respondents, ages 25-40 years. Respondents have an annual household income of $100,000+ and either 1) contribute $20,500 or more to retirement investment accounts, or 2) meet or exceed their employee sponsored match and are making/interested in making additional contributions to another account.

1 Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.

Fixed index universal life insurance (FIUL) is not a traditional college funding vehicle. FIUL insurance policies require qualification through health and financial underwriting.

Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America.

Products are issued by Allianz Life Insurance Company of North America, PO Box 59060, Minneapolis, MN 55459-0060.

This content does not apply in the state of New York.