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Funding college without wrecking retirement: How one advisor helps clients pass this scariest of tests

Brian Anderson

It’s no surprise that many parents are unprepared financially to help their children pay the ever-escalating cost of attending college.

The College Board reports that a “moderate” college budget for an in-state public college for the 2014–2015 academic year averaged $23,410. A moderate budget at a private college averaged $46,272. Tuition and fees are increasing at a rate of about 3% per year, according to the College Board Annual Survey of Colleges.

Figuring out how to pay for college is a daunting task that freaks out plenty of parents, to be sure. That being the case, there’s a big opportunity for insurance and financial advisors who can help those parents figure out how to fund their children’s college education without wrecking their own retirement.

“The major reason it should be on the radar for advisors is because people are sorely ill-prepared for the cost of college today,” says Kerry Wallingford, CLU, ChFC, CCA, RICP, president at Wallingford Financial & College Planning in Seattle.“If they do not have responsible advisors, that are helping them make sure they can afford college – but more importantly they are on track for retirement – then we’re going to find a lot of people who are falling into retirement completely broke.”

Wallingford, a producing general agent who has been with Ohio National since 2009 and specializes in college planning, says the subject is an opportunity for advisors to make sure they are looking out for their clients’ best interests.

“When I talk to families, nine times out of 10 the clients have no idea how expensive college really is, and they secondarily have no idea how prepared or how ill-prepared they are for retirement,” Wallingford says.

She says it’s a very natural conversation to have when you’re asking a family, ‘Do you know if your retirement plan can sustain your college tuition payments?’ “Invariably, they don’t,” Wallingford says. “I think that without proper retirement planning, people shouldn’t be talking about college. For an advisor, college planning should be part of the conversation as much as ‘do you have a will?’ is part of the conversation.”

If the client has children, chances are they’re going to need help figuring out how to pay for their college. If they don’t plan the right way, they could well end up destitute for retirement. Still, Wallingford finds it’s a conversation parents aren’t anxious to have with either their advisor or their kids.

“Parents still don’t like to talk about it. Talking about money almost seems like voodoo. We have to break that cycle,” Wallingford says. “As advisors we need to begin the conversations with parents at a very early age to help them understand what it’s going to take to get ready for college and get ready for retirement. Those are integrated conversations; not mutually exclusive conversations. They have to be talked about in conjunction.”

Where to start

Fact-finding and then educating the client is how Wallingford typically begins the whole process.

“We’ve got to walk through slowly what they’re doing with their money and where it is first. Often times I find clients who are max-funding their 401(k), putting money into a Roth,while building no capital that is liquid or even potentially available to help with college. So the first place I have to start is by educating the client on the advantages and disadvantages what they’re doing with their money,” Wallingford says.

Then she goes through the process of educating the client on what whole life insurance is and what it does. Here’s one example of an educational technique she uses:

If I said to you, “you can choose to pay $200 for $1 million of life insurance or $20,000, what would you pay?” Of course they say $200. My next question is if I can design investment utopia, let’s talk about what we want our investment to do:

• First of all, we want it to have tax-deferred growth;

• Secondly, we would want it to have tax-free withdrawals (Whole life policies may be subject to taxation);

• We want it to have a competitive long-term rate of return;

• We want to be able to contribute as much to the investment as possible, so no limits to what we can put in (except MEC limits);

• We want to be able to know that it’s safe and it’s got a no-loss provision (WL can “lose” money if surrendered);

• That it can be used as collateral;

• That we’re guaranteed to be able to borrow against it;

• That it’s protected from creditors or from lawsuits (depending on the state);

• It’s still going to be an investment if I get disabled or I die – it’s going to be there (with an optional rider, conditions apply);

• And it’s tax deductible.

“If we have all of those opportunities in one investment, Mr. Client, how much of your $20,000 would you put there?”

Typical clients will then look at me, and say, ‘Can I put more than twenty in?’ And I look at them and say, ‘Yes, as a matter of fact you could, but there’s one thing you can’t have out of all 11 of these, would you be willing to give up tax deductibility? They say yes, and I say, ‘Well guess what? Let me introduce you to permanent life insurance.’ And their response is, ‘Huh? How come I have never heard of this before?’”

The ability to explain what it does and have the client say they want to put as much in there as they can is a field underwriter’s dream, Wallingford says.

“It’s a matter of educating the client in how life insurance works, first. And once you do that it’s a very rare situation where someone says, ‘Well, I really don’t want to do that,’” Wallingford says. “If they say that, I go back and say, ‘OK, you tell me which of these features about permanent life insurance you don’t like.’”

Wallingford says clients don’t typically come in knowing much about how cash value life insurance works, which is why it is so important to help them understand.

“You have to make sure that if you’re going to teach your clients about whole life insurance and how it works, that you have materials that they can read to follow up that informs them and teaches them. And there’s some great bookswritten by people in our industry that help clients see how life insurance can really work,” Wallingford says.

529 Plan vs. Whole Life

Section 529 plans are of course a popular college savings vehicle, offering federal and sometimes state tax benefits. They subtract far less from a student’s potential financial aid eligibility than money stored in checking or savings accounts, but having a robust 529 account could still hurt the student’s chances at tapping other sources of financial aid. And money in a 529 plan can only be used for qualified education expenses, including tuition, fees, books, room and board at an accredited U.S. school.

If a child receives a full scholarship, attends a foreign or unaccredited school or simply decides not to go to college, 529 funds can be transferred to another beneficiary or the parents can pull the funds out and pay income tax on the withdrawal. They may also have to pay back taxes if they’ve taken state deductions over the years.

“We put those dollars into the 529 plan with after-tax money. They grow tax-free as long as we use them for education, and they are subject to market risks (not always – some FDIC-insured safe investments are available). If we do not use them for education we will pay a 10% penalty and will be paying taxes on the gain over our initial investment,” Wallingford says.

She also notes that when you take the money out of a 529 to pay for college, there is no ability to replenish the tax-deferred, tax-free 529 bucket. It’s gone. That’s not the case with whole life. “You have access to the capital with uninterrupted compounding while you can leverage it and use it for college, and then you have this bucket that has an ability to be refilled to use again for retirement, unlike the 529 plan,” Wallingford says.

Colleges typically require tuition and other fees to be paid fully before a semester begins, which might mean a $12,000 check. “Most people’s cash flow might not accommodate an extra $12,000 in a month, but maybe they can accommodate $4,000 of extra cash flow in month,” Wallingford says. ‘That’s when you take out a loan from your cash value life insurance.’ “Send thecheck to the school and then pay back the loan at $4,000 a month, so it’s there again at the end of the semester, and available todo it all over again.

“Meanwhile moneycontinues to earn uninterrupted compounding, which over a 15- or 20-year term, from when kids go to school and when a parent retires, that is becomes excruciatingly important. If you interrupt the compounding curve 15 years before you’re due to retire by paying out cash, then you have to start all over again. That’s what we don’t want to do. The uninterrupted compounding of money that whole life allows you to have is incredibly valuable when you start looking at it in the long term,” Wallingford says.

“But more importantly,”she adds, “you’ve also guaranteed that if you’re client isn’t there to make the dreams of a higher education come true, the money necessary to make it happen will be created immediately.

“You can’t do that with a 529 plan. With a 529 plan, whatever’s there is there. If mom or dad passes away, then you still have whatever’s in that 529 plan,” Wallingford says. “With the life insurance policy, not only do you have the cash you’ve built up that’s protected and safe and guaranteed, but you’ve also got this magnificent tool that makes the dreams happen when you’re not around to make sure they do. So the leveraging point is beyond phenomenal.”

It is important to note that parents saving for college in a cash value life insurance policy won’t receive a state income tax deduction that many 529 holders invested in their state’s plan receive. While not every state offers a 529 deduction, it can be significant. In a New York 529 plan, for example, families get a state tax deduction up to $5,000 per parent.

Financial aid eligibility

When it comes to a student’s financial aid eligibility, money in a 529 has to be declared on the student’s Free Application for Federal Student Aid (FAFSA) form. Money in a cash value life insurance policy does not have to be declared on the FAFSA.

Wallingford says a lot of mistakes are commonly made when filling out a FAFSA, and advisors can add a lot of value to clients by being well versed in the intricacies of this important form.

“If someone’s going to call themselves a college planner, they should certainly understand how that FAFSA form is completed, and what information adds to it and doesn’t add to it,” Wallingford says. “Advisors who are quick to try and sell the 529 plan may not realize they could be doing their client a disservice, when there’s a product like whole life insurance with the guarantees behind it, including the lack of volatility that could substantially help the client more efficiently pay for college.”

Federal Student Aid, a part of the U.S. Department of Education, is the largest provider of student financial aid in the nation and processes approximately 22 million FAFSA submissions each year. It provides more than $150 billion in federal grants, loans and work-study funds each year to more than 13 million students.

• To comment on this article or add your own insight on college funding, please visit this new thread: College Funding Without Wrecking Retirement

• For more discussion on college funding, also check out this thread: How Many Errors Can YOU Spot?

Designing the right coverage

For whole life to be an efficient college planning tool, time has to be on the side of the client. You’ll get a competitive rate of return over a period of time, but if you’re only looking at a couple of years, that’s not going to be the case.

“When people come to me and they’ve got a senior (in high school), I will not work with them because there’s just no way I can do my job effectively enough to help them when it’s that late,” Wallingford says.

You’re going to want to have 5 or more years typically before the client is going to need to access the policy. “The way we design them in an efficient contract, by the fifth year the money is pretty much there,” Wallingford says. “Even if it is repositioning assets that are sitting in money markets, CDs and cash, we can reposition that over a 5-year period to a highly efficient whole life insurance policy, still have all the money there, but now it’s invisible to the FAFSA.”

“If you are looking at a parent who has five to 18 years, you’re going to have an internal rate of return with after-tax dollars that can be quite competitive when considering what some of the 529 plan results have been– it’s probably 4% if you design the policy the right way,” Wallingford says.

When the policy is intended to be a tool for college funding, that typically means purchasing a policy with a low death benefit amount focusing on building the cash value. “It’s always in the best interest of the client when we’re trying to design a policy for maximum efficiency that you focus on accumulation, not on the death benefit, in my opinion,” Wallingford says.

“When families have a lot of time, that just gives them more opportunity,”Wallingford adds. “I’ve got families who I’ve started on whole life contracts who didn’t even have a twinkle in their eye for their kids, and now they’ve got a little one who’s maybe 6 months old. By the time he gets to college, they may well have about $400,000 in that policy that they can access.”

Wallingford cautions that of course, every circumstance is going to be different and not everybody is going to be a suitable candidate, just like any situation for a whole life product. But the ability to understand how this tool might help a family plan for their children to afford college is critical.

Whole life vs. 401(k)

To make the coverage as efficient as possible, Wallingford says she typically will put 50% of their dedicated premium into a paid up additions rider to begin to build cash liquidity right away. This way, by the second year, you have more access to capital than you would in a 401(k) plan.

“It’s one of those things where you have the ability to create liquid capital more readily for the client, which is what they need from the college planning standpoint,” Wallingford says.

If a potential client brings up the “whole life insurance is a bad investment” objection, Wallingford counters it this way:

“Life insurance is not an investment. What’s the fundamental definition of an investment? You have risk. I don’t haveany risk with the amount of money in my life insurance policy. It is guaranteed money. I’ve got it right there. I don’t have risk like in the market. The market goes down, my policy doesn’t change. It’s the advisor’s job to educate the client on the difference between and investment and savings. The bottom line is market risk and a whole life insurance policy has no market risk,” Wallingford says.

She might then compare a 401(k) and a whole life policy, and points out that while the 401(k) would fare slightly better if the funds had to be withdrawn after just a year, from the second year on a properly designed whole life policy would have the advantage due to the tax free nature of living benefits.

“And here’s the beauty of a whole life insurance policy compared to a 401(k): In my later years, I get it all back, and I get it all back tax-free. You can’t say that about a401(k) accountbecause the government forever has a lien on your 401(k) and they’re going to decide what interest rate they’re going to charge you when it’s time to take your money out. Mine doesn’t have that. I don’t have to deal with tax code. The government isn’t a part of our party – they’re not invited to the table, at least under current tax code,” Wallingford says. “Any dollars that I have over a 401(k) match, it makes no sense to put it in the 401(k). If I can get tax-free money, I’m going to have as much if not more in my life insurance policy – all things being equal – than I would have in a 401(k).”

Whole Life vs. Roth

The differences between a Roth IRA and whole life is that the Roth has a limit ($5,500 or $6,500 age 50 or over) to your ability to contribute based on your income and age. “What you put into a Roth is all it’s worth. You can’t borrow against it and keep it earning interest, and if you’re a higher earner (more than $193,000 married/filing jointly or more than $131,000 filing single) you can’t even play in that ballgame anyway,” Wallingford says. She points out that the life insurance policy provides a death benefit; you can borrow against it; no matter what you make you have no limit on what you can put in it; you get the money tax-free and you get a competitive rate of return.

“Well,” Wallingford says, “why would I do a Roth if I could push my money over here and not only have all of that benefit, but if I die, my family gets far more than the Roth would ever provide?”

Becoming an expert

Wallingford says advisors who want to help clients plan for their children’s education need to spend the time and make the effort to become well educated about the process themselves.

Beyond understanding 529s and whole life, it takes an understanding of the financial aid regulations, timelines and college admission processes.

“If advisors are going to get into this arena, they should learn about it, read about it and stay up on it, so that if a family is coming to them, they’re not just a product-pusher. They are a trusted consultant to help this family mitigate a daunting issue that they are facing,” Wallingford says. “College is ridiculously expensive. You have to be prepared to help families think outside the box about the education for their kids, and make sure that you’re being a realist.”

It’s all about giving clients good advice not only on paying for college, but preparing the kids to navigate the obstacles they’ll encounter as they go through the application process.

“The money’s just a part of it. Prepping that kid, applying for the schools, knowing the timelines and knowing what majors to study – all of those things also bear great weight on what the cost of college will ultimately be. If you get a kid into school on one major and all of a sudden they change majors, then you are going to increase your cost of college,” Wallingford says. “I think it’s just really important that advisors know what the heck they are talking about when it comes to the whole concept of college prep.”

About Kerry Wallingford: Kerry Wallingford, CLU, ChFC, CCA, RICP is a producing general agent (PGA) with Ohio National Financial Services and is based in Seattle. She is a 15-year Qualifying and Life member of Million Dollar Round Table with four Court of the Table and five Top of the Table qualifications. Wallingford’s awards and honors include being ranked as one of Ohio National’s Top 30 PGA leading agencies and as one of the Top 25 Leading PGA agents. Her agency, Wallingford Financial Services, can be reached at 206.241.2634 or[email protected].

• To comment on this article or add your own insight on college funding, please visit this new thread: College Funding Without Wrecking Retirement

• For more discussion on college funding, also check out this thread: How Many Errors Can YOU Spot?



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