Using Indexed Universal Life (IUL) for college savings uses the same cash accumulation strategy as Indexed ULs for tax-free retirement income. Cash value grows tax deferred and is distributed as tax free loans. The IRS limits the amount of premium that can be put into a contract and keep the distributions taxed advantaged, rules for Modified Endowment Contract (MEC), so the goal is to put in the maximum premium allowed below that limit. In life insurance terminology, the guideline level premium determines the policy face amount. The death benefit is structured as increasing during the accumulation phase and level during the distribution phase.
Granted other options are available, but with an indexed UL, there’s downside risk protection with at least a 0% floor to index crediting, Lincoln has 1%. Also there’s a death benefit in the ultimate worst case scenario for the parent.
The starting point for the prospective policyholder is to determine how much premium and for how long? The countdown clock for college savings is simple: 18 years.
Male age 42, best health rate, $10,000 premium per year for 18 years. Amounts assume a 8.45% index interest rate, S & P 500 annual point-to-point index.
| Carrier | Initial Death Benefit | Cash Value Year 18 |
Death Benefit Year 18 |
Distribution Years 19-22 |
Cash Value Year 23 |
Death Benefit year 23 |
| . | ||||||
| Lincoln | $225,000 | $348,527 | $574,527 | $102,444 | $67,157 | $181,703 |
What if the market doesn’t preform that well? Be sure to review multiple index return scenarios. They are easily illustrated. Here are 5% index return projections.
| Carrier | Initial Death Benefit | Cash Value Year 18 |
Death Benefit Year 18 |
Distribution Years 19-22 |
Cash Value Year 23 |
Death Benefit year 23 |
| . | ||||||
| Lincoln | $225,000 | $246,646 | $471,646 | $59,658 | $46,689 | $207,551 |
Looking at a 10 year time span for $10,000 in premium instead of 18, the results didn’t work out very well: $37,021 in distributions assuming 8.45%. As in most savings plans, the earlier the start, the better.
Lincoln National Life Insurance Company: “Lincoln LifeReserve Indexed UL (2011)
Quote run 1/17/2012. Rates subject to change.
Sean Drummey
Phone: (910) 328-0447
email: spdrummey@gmail.com
Sean – why not insure the child instead of the parent? The parent can own and control the policy, Wouldn’t the cost of insurance be lower?
John
Yes, it’s a viable strategy for the child to be insured with the parent owning policy. The cost of insurance is lower. It depends on the situation. The advantage to the parent as the insured is having the death benefit protection to protect against the loss of the parent’s income.