Financial planning for LEOs: Paying for your kid's college education
I hear that one of the proudest days in the life of a parent is the day a child gets accepted to college
I’ll never forget the day that my friend Steve called me and told me his daughter got accepted to Syracuse University in New York. You could hear the pride and sense of accomplishment in his voice.
“I finally did something right,” he said.
Steve, like many people, started a 529 plan for his daughter when she was young. A 529 plan is a state-sponsored college savings plan. The plans are named after Section 529 of the Internal Revenue Code and are administered by state agencies and organizations.
Each state’s plan is different. All withdrawals from 529 plans for “qualified” education expenses will remain free from federal income tax! Many states mirror the federal tax advantages for 529 plans by offering state tax-deferred growth and tax-free withdrawals for “qualified” higher education expenses.
Sounds Like a ‘No-brainer’
It’s still the best way to save for college. There are some restrictions to this plan, which are significant. But this was the biggest problem — most 529 plans invest in mutual funds. Steve’s feeling of pride and accomplishment soon turned to panic. It was 2008, and one of the biggest downturns in stock market history just hit Steve’s 529 plan.
At the time Steve’s daughter got accepted to Syracuse, tuition, room and board, etc. was about $52,000 a year. Nope, that’s not a typo. Before the crash, Steve had about three quarters of this $208,000 saved in his daughter’s 529 plan.
But now the plan was worth 60 percent less! So, if you do the math, Steve had about $62,000 left — enough for one year. We all know the market recovered since then, but Steve needed the money right then, he couldn’t wait for a recovery. She attended Syracuse anyway, but at a huge penalty to Steve’s retirement plan.
As a financial professional (and a cop), I started to investigate ways of saving for college in addition to 529 plans.
CD’s? Forget it. Not even one percent interest over five years.
Annuities? Good returns, but not unless you’re 59-and-a-half to take your investment penalty free.
I found that life insurance companies offered a reasonable solution.
A Part of Your Plan
Whole life insurance is a type of permanent life insurance that builds cash value. Guaranteed. Many companies pay about five percent on your money.
That’s NOT a typo.
So it should be a part of your plan. A 25-year-old male in excellent shape (weren’t we all at 25?) would pay $2,860 a year for a $500,000 policy. This means if you were to die, your family would get $500,000, which of course is something 529 plans don’t offer.
But here’s the kicker. After paying into it for 18 years, when junior is ready for college, it’s worth $63,000. So not only did you provide $500k of life insurance for your family in the event of your death, but you had guaranteed money to use for whatever you want — not just “qualified” education expenses.
By the way, I didn’t quote the highest paying company, as not everyone could qualify. Sorry guys, women would pay less. They live longer than we do.
The whole life policy cash value would have given Steve’s 529 plan time to recover. As we all know, the market is back to where it was before the crash.
As is the case with all college savings plans, the key is to start early. It’s too late to start a plan when they’re in high school. So, although the 529 plan should be your primary college savings plan, guaranteed whole life insurance should play a role in your family’s financial plan.
It just makes sense.