Today I’m sharing an article that Stephanie Hancock, CFP, who is a financial aid expert at College Aid Consulting in Los Angeles, wrote about the potential dangers of using life insurance to hide assets.
What families, who are eager to qualify for more financial aid, don’t understand is that insurance agents, who are suggesting this move, are almost always doing so to generate fat commissions for themselves. Parents usually cross paths with these agents after receiving invitations to attend free presentations from “experts” who claim to possess valuable financial-aid secrets.
After reading this post, I’d also urge you to read a great article in Money Magazine by Kim Clark, who is a friend of mine, about insurance agents peddling insurance for college. Here is the link: College Aid: Don’t Take the Bait Lynn O’Shaughnessy
More and more, families are being approached about purchasing permanent life insurance policies as a means of reducing the family’s expected contribution (EFC) in calculating college financial aid eligibility.
Self-proclaimed college planners explain that this strategy works because the cash value of life insurance policies is not assessed by the financial aid formulas. The premise is that by simply purchasing life insurance, one can dramatically reduce the amount a family is expected to contribute for college and increase the student’s eligibility for financial aid.
Recent example:
My 48-year-old male client had been approached about moving $500,000 from a savings account into a life insurance policy. To accommodate this large contribution, the death benefit 
(face value) of the life insurance was $2.2 million. The out-of-pocket cost of this policy was about $18,000 per year.
The family was told by the person selling the insurance that their Expected Family Contribution (EFC) would drop by $30,000. Only later, after purchasing the life insurance, did the family learn that reducing their EFC by that amount did not result in an equal increase in financial aid; the actual amount was $8,000 and only part of it was gift aid.
In fact, based on the college’s financial strength and its history of awarding aid, this could have been predicted. The family spent $18,000 on life insurance they didn’t really need to receive $8,000 in additional financial aid. Be careful!
As enticing as it sounds, here are some things to understand and consider before moving forward:
- Does the college count the cash value of life insurance policies in its formula? FAFSA is not the only financial aid form used by colleges. Some schools which use the CSS Profile or their own secondary forms may specifically ask about the cash value of life insurance policies.
- How much of a reduction in the EFC can you expect to receive? Remember that the financial aid formulas are more income-driven than asset-driven.
- What is the actual cost of the insurance? How much will you be paying to have coverage?
- What is the financial strength of the colleges where your student will apply? How much more aid can you realistically expect to receive? It will be a lot less at a school that meets 64% of need vs. a school that meets 90% of need.
- What is the quality of the additional anticipated financial aid? Will it be more scholarship and grant (gift) money? Or is it likely to be more hours of work-study (student job) or loans?
- What happens with the life insurance policy when you no longer want or need it?
- What will be the costs (fees, interest, etc.) if you want or need to access the cash value of the life insurance?
- What would be the impact on future financial aid if the cash value of the life insurance policy is accessed during the college funding years?
- Do you actually need or want life insurance?
Learn More:
Hiding College Funds in Life Insurance
Hi! You raise some very important points. We recently were taken in with the CRGB program’s schtick, and I’ve been skeptical of their push to cash out our son’s UTMA to purchase a Cash Value Life Insurance policy through them. Do you know specifically what criteria the CSS Profile uses in determining their ratios? We’ve heard anecdotally that they count 25% of UTMA child assets. We know for sure that FAFSA would penalize us 20% per year on the UTMA account, but if we converted that to insurance doesn’t the cash value get apportioned in the CSS Profile calculations anyway, so if we indeed bought the insurance, there is still no guarantee that it won’t be counted against us, and no one seems to know the exact ratio that is used in their calculations. Most of the schools our son is applying to are CSS profile schools. Many thanks in advance for any help!
Author
HI David,
Profile schools can consider the cash value of a life insurance policy so this is not a way to guarantee assets will be “hidden.” I would run from anyone who suggests hiding assets with life insurance. These guys typically have no idea how colleges actually dispense money – they just want a fat commission for an expensive and unnecessary product. And this is NOT the correct approach. If you have a high Expected Family Contribution, you should be looking for schools that provide generous merit scholarships for high-income students, if you have a lower EFC look for schools that provide generous need-based aid. Whether you qualify for merit or need or a combination of both, what’s important is getting a discount – it doesn’t matter what it’s called!
Lynn O’Shaughnessy