Hiding College Assets in Life Insurance

Wednesday was surreal.

I got up before dawn and schlepped up to Ontario, CA, to attend an educational conference of a new organization called the National College Advocacy Group. I’ve listened in on some excellent webinars that the NCAG has hosted and this was the first time that I had an opportunity to meet college consultants in the organization.

The day was surreal because I ended up sitting between two guys who sell life insurance to families who are anxious about paying for college.

I have warned people for years to stay away from college planners who use insurance as a financial aid strategy. Life insurance is expensive and families do not need to buy it.

Coincidentally, last week I wrote a blog post for CBSMoneyWatch on the dangers of college “experts” peddling life insurance to hide assets from colleges.

I was asked to give a talk at the workshop and I had worried that what I was going to share about determining the affordability of different schools would be too elementary for this group of professionals. While there were some sharp independent college counselors in the audience, many of the guys who make a living off of insurance commissions didn’t seem to have a grasp of what I was talking about.

I guess you can sell insurance as a financial aid panacea without knowing anything about how the college admission process actually works!

Listening to insurance pitches

After hearing pitches for insurance, I thought my head was going to explode. When I caught the attention of the presenter, I argued that life insurance is expensive and unnecessary as a financial aid tool.  Of course, you could also argue that hiding assets in life insurance is unethical.

As a practical matter, most families haven’t accumulated enough assets to even warrant trying to hide them. Mark Kantrowitz of Finaid.org has observed that only about 4% of families possess enough assets to reduce their financial aid package.

As I mentioned on my CBSMoneyWatch blog, whether or not you receive financial aid is driven primarily by your income.

The big reason why investments rarely negatively impact financial aid is because you can shield so much of them automatically. Colleges don’t count any retirement assets in financial aid calculations. In addition, all parents get to automatically shield college money thanks to a federal asset allowance. For example, if you are 55 when your first child starts college, you would be able to shield $60,200 in assets. And the rest of the money would only be assessed at 5.64%.

None of the insurance agents, by the way, addressed my arguments.

At the end of the day, I expressed my frustration to one of the insurance enthusiasts standing in the lobby. When I argued that life insurance is unnecessary as a college financial strategy, the fellow responded,  “But without commissions, how would I get paid?”

Maybe he could start by looking for a different line of work.

Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller, and she also write college blogs for CBSMoneyWatch and US News. Follow her on Twitter.

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  1. In any professional field there is going to be abuses and college advising is not exempt from this. There are many ways to help families pay for college, insurance being a particular strategy that could possibly be used in many instances. If something were to happen to a family’s bread winner, the children may be hard pressed to complete college without going into extreme debt. However, it could also be true that the family may qualify for financial aid if they had no life insurance, but the family would still be in extreme trouble. Not to mention this possibility would be a breach of the fiduciary responsibility of the college planner and insurance could only be uncovered and recommended after a proper search of all of the facts and circumstances in each individual case.

    One of purposes of the National College Advocacy Group is educating. We present topics of all sorts to college planners regarding admission, placement, cost, applications and financial aid. They are all interrelated as are the tools to solve any problem. To ignore any tool would be incorrect and a cause for a malpractice suit. It would be tantamount to ignoring a college simply because the planner has a personal bias against that institution.

    We advocate a proper student match both academically and financially to ensure the success of a student. This success is put in danger by the planner who does not recommend colleges where the student will fit in both academically and socially as well as the planner who places the family without respect to affordability. Too many students withdraw after a few years due to a lack of affordability and then are faced with no degree and substantial student debt. Although the NCAG does not advocate insurance as a “one item fits all,” it’s a valuable tool when used correctly and a dangerous one when used incorrectly.

    Our purpose is to educate all people in the proper use of academic and financial strategies. College guidance’s end goal should not be just to place the student in the so called best college the student can get accepted to, but the best college for that student both academically and financially. We advocate learning all of the uses and abuses of all strategies and programs in order to learn and to make the best possible recommendations to our clients and to foster the proper and enlightened use of items, strategies and opinions.

    Our message is clear: do not group people, or for that matter products, into categories and assume they are all bad because of abuses. Find out who and what they are, get references and educate yourself and others with open eyes, allowing people to expand rather than contract their opportunities for college choices and matches.

    Joseph P. Nagy, MS, PFS, CPA
    NCAG Board Member

  2. There are life insurance agents/college planners who are using college just to sell insurance. The National College Advocacy Group (NCAG) does not endorse this activity.
    A CPA has a fiduciary responsibility to present to his clients all the legal deductions and credits that are available to the clients. If he does not, he is violating his professional standards. Each client has the option to accept or reject those deductions/credits.
    When planning a college planner also has a fiduciary responsibility to present to his clients all the legal options they have under the law. The client can then accept or reject any of those options. If a college planner does not disclose this information to the client, he is violating his professional standards.
    Life insurance or annuities are not right for every family planning for college, but it is one of the options that families need to know about.

    Gary E. Carpenter, CPA
    Executive Director
    National College Advocacy Group

  3. I’m generally a fan of Lynn O’Shaughnessy, but she is way off base here and is unfairly using gross generalizations to make a point.

    Let it be granted that many insurance agents are insincere, ignorant, money-hungry, and unethical. The same can be said of Realtors and car salesman, as groups. Does that mean that someone who’s looking to purchase a home or an automobile should avoid a Realtor or car salesman, lest they be ripped off? Clearly, no. What they should do is investigate, evaluate, and make an intelligent decision on their purchase. Caveat emptor.

    The fact is there are thoughtful, respectful, respectable, well-meaning and results-oriented college planners out there who happen to strategically use life insurance not only to enhance financial aid opportunities for families but also to enhance their overall financial strategy aside from paying for college. But those planners don’t use just any insurance policy. They don’t use “expensive” cash value policies because they don’t “rip people off”. They use policies appropriate for a given family’s situation. If there are no policies appropriate for a given family’s situation, they don’t use insurance, period. But the policies they DO use for college and financial planning purposes are amazing products which are demonstrably superior to buying term insurance and investing what’s left “in the market”. I speak not here of “your grandfather’s cash value life insurance”.

    Moreover, it’s false and ignorant statement that shielding assets makes little difference in obtaining families financial aid. As in so many other areas of life, IT DEPENDS. I’m a college planner and I strategically employ life insurance in my practice, simply because it works. I’ve seen case study after case study, result after result, proving that, all other things being equal, including income and merit of the student, families with fewer assessable assets win significantly more financial aid than those with more assessable assets. The reason, quite simply, is that college is a business, that colleges try to make as much off each incoming student as possible (nothing wrong with that, by the way), and that in the case of a meritorious student, the family’s ability to pay, measured not just by income but also by assets, makes an appreciable AND MEASURABLE difference in offers of financial aid.

    If Lynn O’Shaughnessy were exposed to a more thoughtful argument about the merits of college financial planning and the strategic use of APPROPRIATE life insurance policies, she might see that there’s more to it than she currently realizes. She might also qualify her statements.

  4. I still don’t see one example of how insurance can ethically be used to pay for college.
    Furthermore the insurance company is getting paid for certain..it’s just another bad idea.

  5. Most people develop opinions based upon their experiences, many times these experiences are not accurate reflections of what is actually true.

    Let me just say that I agree many life insurance agents/college planners misrepresent and misuse life insurance as a college planning tool.

    When I observe a polarization of opinion, either way for an issue or against an issue (this example, life insurance), I stand back and think, “If only they knew the real truth”. Many times the answer to various “financial advice” questions is “It Depends”.

    Here is an example of a misinformed opinion, “Life insurance is expensive and families do not need to by it”. Simply not true, it depends on a families financial objectives and college may or may not be part of that process.

    I am going to illustrate some examples briefly to demonstrate how people do not have the truth yet form strong opinions based upon their “experiences”…information they have been exposed to that provides the “input” for their conclusions.

    These statements are true and can be validated.

    1. “529 Plans – Pay For College Tax Free”, we all see ads for 529 plans touting the tax free earnings. Are they, “It Depends” because there are “events” that reduce the “tax free” earnings into taxable earnings. I do not see any ad running with an asterisk citing the IRC code that explains this, over and over in the media it simply “tax free”.
    2. “Max Out Your 401(k) Plan” battle cry, is that a smart move? “It Depends”. Who has liquidity, use, and control of your 401(k) money? When you put money into a 401(k) you are doing two things, deferring the tax and deferring the tax calculation. What if you put money in today at a personal tax rate of 25% and later take it out at a 50% tax rate? Who wins? Not You!

    If you set up two plans, one 401(k) and one private, use the same interest rate on your rate of return, pay the tax today on your private plan, and use the same tax rate when you put the money in and take it out. Which plan do you have more money in, the 401(k) plan or the private plan? They are the same. Remember, you have to pay the tax on the 401(k) plan at the end.

    So is a 401(k) such a good deal, “It Depends”. You are betting on a lower tax rate when you take it out then when you put it in. Of course when there is employer matching it’s a different scenario because the match can potentially pay the tax and it’s “free money” outside of your work effort.
    3. Which is better, a 15 year mortgage or a 30 year mortgage? “It Depends”. Why do you think banks charge less for a 15 year mortgage? They get your money faster so they can go and loan about $9 for every $1 you pay them back. Once again, conventional wisdom is a 15 year mortgage is better than a 30 year mortgage. The truth is they are the same when you use the same interest rate and tax rate, too many numbers to explain here.
    4. “Pay your house off as fast as possible”. A winning financial concept, right? “It Depends”. As long as you don’t care about the wealth you are transferring away then great, good idea for you. Wait, wealth transferring away, what do you mean? Equity in a house makes zero rate of return. It’s rather simple to prove. There are only two things that can occur to wealth inside a house. It either appreciates or depreciates, period, end of the story. I am not speaking to emotional issues here, just the math and what is “true”.

    So take a breath, and when we form polarized opinions on issues, let’s try and really make sure we have the truth.

    “If what you thought to be true turned out not to be, when would yo want to know?”

    P.S. I left examples about life insurance out on purpose. “It Depends” becomes “How Much Can I Get?”.