Reclassifying Cash Assets for College Financing
My oldest of three children will start college next year. Two different college financing specialists have advised me to 'reclassify' my cash assets (about $250k liquid) into equity-index universal life policies so it won't disqualify us from eligibility for federal, state and/or institution financial aid (by reducing the EFC, Estimated Family Contribution).
I'm not convinced that the life policy is a strong investment vehicle. The Non-MEC plans apparently allow you to borrow out accumulations tax-free. The claim is that you never end up paying tax on the earnings. What about at termination and/or death?
Is there a better alternative? I'm suspicious about the recommendations, because I suspect the specialists' primary goal is to earn a commission from sale of insurance policies.
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posted by Jeffrey D. Voudrie @ 12:51 AM
2 comments
2 Comments:
Sometimes the cure is worse than the sickness! I tend to agree with your suspicion. The tax-deferred access to your money only applies if you keep the life insurance in force until your death. If you ever cancel the policy then that money can be taxed. So much for that!
I don't think the investment benefits associated with EIUL are all they're touted to be either. You can invest that money in stocks and high-dividend paying stocks and go for growth while the dividends and capital gains are taxed at only 15%. Plus, you can also write off any losses.
Their suggestion also requires you to lose a lot of flexibility and access to that money.
Lastly, how much government aid is your student likely to receive? Is it tens of thousands of dollars? Probably not. And is the 'aid' a grant or a loan?
Great question, thanks for asking.
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Many thanks for your prompt reply! I've been concerned that the amount of financial aid I might qualify for could be minimal at best even if I reclassify assets (due to my relatively high AGI), and might consist mostly of loans rather than grants/ gift aid, in which case it really isn't a benefit at all (since cash availability isn't a problem in the first place).
I will ask the specialists to tell me about the tax implications if the EIUL plan is terminated prior to end-of-life and see if they acknowledge/admit what you've just told me. It seems that they conveniently omitted this information before!
I'm very grateful for your response, and appreciate your free service for my question. I will continue to peruse your web site to get more familiar with the advice you have for others, and may contact you regarding your paid services as a financial adviser.
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