Secure Your Child’s Education With Life Insurance

Secure Your Child’s Education With Life Insurance

Learn how you can leverage life insurance for education planning with the right strategies.

Did you know the average cost of a four-year college increased by 36.70% between 2010 and 2023? To make things even better, the annual college tuition inflation rate sits at an average of about 3.63%.

To wrap it all up, the cost of college tuition alone has increased by nearly 200% since 1964.

These numbers, alongside other factors, should play a crucial role in education planning for your children. Successfully reaching your goals (and securing their futures) requires proactivity and leveraging the best options available to you.

You may already be familiar with the importance of saving early and the 529 college savings plan, but did you know that life insurance for children can also help?

How Life Insurance Fits Into Education Planning

You may already have your own life insurance policy in place to protect your family in case the worst happens. 

But life insurance can also provide a safety net for your child’s education. The lump-sum payment beneficiaries receive can be used for paying for college expenses, including tuition, fees, room and board, and other associated education costs.

There are two primary types of life insurance policies to know: term and permanent. 

• Term life insurance: Term insurance is generally more affordable but only covers you for a certain period, such as 10 or 25 years. If you pass away during that period, your beneficiaries can receive the insurance benefits.
• Permanent life insurance: Permanent insurance may cost more, but it can last a lot longer, often for the rest of your life. Permanent life insurance policies include whole life insurance, which provides a fixed benefit a steady value increase in payout throughout the policy’s lifespan; and universal life insurance, which allows you to alter what you pay into it and how much your beneficiaries will receive.

In general, whole life insurance allows you to set up your policy so that a portion of your premium payments is saved for the payout upon your death and another portion is saved in a separate cash-value account. 

When your children are ready to go to college, you can then borrow from that cash value you’ve accrued. This is a loan, so if you don’t pay it back, the regular death benefits will be lower.

In any case, be sure you name your child or children as beneficiaries of your life insurance policy to ensure your policyholder knows how you plan to use the money. You can also establish a trust to manage the life insurance payout if you have minor children.

How to Calculate Your Insurance Needs

So, how much should you be investing in life insurance for education?

First, understand the concept of human life value (HLV). This amount tells you how much you would need to save to provide the value you want to leave behind for your beneficiaries based on the current value of factors like income and expenses. 

Calculating HLV incorporates your:

• Age
• Gender
• Income
• Occupation
• Retirement age
• Benefits from employer

When calculating your HLV, factor in your annual salary and potential for future earnings each year. Bring in living expenses and family needs, and consider how long these expenses will need to be covered (for example, consider when beneficiaries would become adults or enter retirement).

Calculating your HLV is an important step in determining how much life insurance coverage you need, especially if you’re replacing your income to cover your family’s expenses. 

Consider using a simple online human life value calculator, which will help you get a more accurate number.

How to Maximize Life Insurance Benefits

Getting your strategy right will ensure you’re maximizing life insurance benefits for your family while also considering how to leverage your coverage for education costs. 

Consider these key strategies for success.

1. Align Your Goals and Risk Tolerance With Your Policy

First, ensure the policy you choose will help you meet your goals. Look at your monthly budget to determine what premium you can realistically afford. Consider your risk tolerance—how comfortable are you with taking more risks for potentially higher payouts? Are you more focused on short-term or long-term financial security?

2. Do What You Can to Maximize the Death Benefit

You have options when it comes to your life insurance policy. There are riders to consider, such as accidental death or dismemberment coverage, which could help you increase payouts. 

Policy dividends can also be used to increase the death benefit or lower your premiums. 

3. Consider Tax Implications of Life Insurance Benefits

Usually, your beneficiaries won’t have to worry about paying taxes when they receive death benefits. 

With permanent life insurance, if you decide to leverage the cash value aspect, funds will grow tax-deferred, and you can borrow money from the cash value with tax-free withdrawals as long as you aren’t borrowing more than what you’ve contributed.

However, there are cases when taxes come into play. One example is when beneficiaries receive benefits in installments instead of a lump sum: The interest that accrues, in this case, could be taxable. 

4. Align Your Strategy With Estate Planning

You want to do everything you can to ensure your beneficiaries receive the life insurance benefits you intended. This means being intentional with your estate plan, creating a will, and naming a guardian for your child or children.

A trust can help you manage life insurance proceeds and ensure they’re used for education expenses. Regarding estate taxes, using an irrevocable life insurance trust ensures that your death benefits are not part of your taxable estate.

5. Leverage the 529 Education Savings Plan

Aside from life insurance, consider other education funding options, such as a tax-advantaged 529 college savings plan that allows your investments to grow tax-free and permits untaxed withdrawals so long as the money is used for qualified education expenses. 

Secure Your Family’s Future With Help From Avior

Starting to save for your child’s education as soon as possible and leveraging all available options are just a couple of the proactive steps you can take to secure their education. 

Life insurance can also be a critical tool in helping you provide the funds your family and children need for their education goals.

With all this said, a financial advisor can guide you in the right direction when your education planning process becomes overwhelming.

At Avior, we take the time to get to know not only your financial goals but your family’s long-term lifestyle wishes. If you’re ready to get started with a one-on-one education planning consultation, reach out to our team today.

Disclaimer: Nothing contained herein should be construed as legal or tax advice. Avior and our Advisors will work with your attorney and/or tax professional to assist with your legal and tax strategies. Please consult your attorney or tax professional with specific legal and/or tax questions. Investment Management and Financial Planner are offered through Avior Wealth Management, LLC, an SEC-registered investment advisor. Past performance is not a guarantee of future results.  Investments are subject to loss, including the loss of principal.