For the many parents who are reeling from recent losses to their college-savings plans, insurers are pitching another option they claim can help: life insurance.
Last week, Massachusetts Mutual Life Insurance Company launched a "Kids Take Charge" marketing campaign that promotes life insurance as a way to pay for college. Allianz Life Insurance Company of North America will roll out its latest campaign on life insurance as a college savings vehicle next month. Both firms join Illinois-based insurer Mutual Trust Financial Group, which this year has been promoting college savings as one of the main reasons to buy life insurance. In addition, insurance companies like National Life Group and Aviva USA have been encouraging their agents to talk about college planning and insurance with their clients.
While insurance companies have long touted whole life and universal polices as a back door way to finance college, experts say rarely have so many companies made such targeted pitches directly to parents. Why now? College savings plans have been hit hard by market losses over the past few months and low interest rates, say financial advisers, while tuition costs continue their steady rise. Insurers, they say, see a ready market in panicked parents.
Insurers say they're not marketing life insurance strictly for the purpose of paying for college, but rather as a policy that provides a death benefit (what life insurance is supposed to do) while also offering a supplemental way to pay tuition. "It's part of the overall full financial planning approach," says Jason Wellmann, senior vice president of life insurance sales at Allianz Life, which a year ago began increasing its marketing of life insurance as a way to pay for college. Mass Mutual says its latest campaign seeks to raise awareness about the importance of life insurance and not just because it can help pay college tuition.
But financial advisers warn that buying life insurance to help cover college costs is too pricey. "I have never met anybody who recommends using these policies who isn't selling them," says Scott Simmonds, an independent insurance consultant in Saco, Maine.
To begin with, the policies that can be used for college costs are so-called permanent life insurance policies, which combine life insurance and an investment vehicle with a so-called cash value that policyholders can tap via a loan for any expenses they choose. But premiums on these policies are about 75% more expensive than the premiums on term policies, which provides life coverage only, Simmonds says.
Rather than paying the higher premiums, advisers say parents could sign up for a term policy and invest the savings elsewhere. Also, most permanent life insurance policies have high fees and commissions that over a 20-year period can eat up to two percentage points off the interest rate of the investment vehicle, says James Hunt, actuary for the Consumer Federation of America. Over shorter periods, the impact of these fees is even more dramatic. For example, over a 10-year period, policyholders on average would see no return because of fees and commissions, he says.
The life insurance industry counters that agents are paid bigger commissions for selling these accounts because they continue to provide extra services such as helping with audits or changing beneficiaries for as long as the policyholder is alive and making payments, says Marvin Feldman, CEO of the LIFE Foundation, which represents life insurance companies. On the other hand, term life insurance only provides such assistance for the limited period of the policy.
Separately, critics of the strategy point out that taking money out of a life insurance policy can put beneficiaries at risk. If a policyholder takes a loan from their insurance plan and passes away before paying it all back, the insurance company will pay out a smaller death benefit to their family than what the policyholder had intended. For example, a policy with a $700,000 death benefit but a $200,000 outstanding loan (plus interest) would actually only pay out less than $500,000 to that person's spouse and children. The same holds true if the policyholder takes a withdrawal, says Hunt.
All that said, for certain families in specific situations, there are some advantages to the insurance strategy. Earnings within the policy are tax deferred, says Hunt, and under current law they're tax free if the policy is held until death. If you're an existing policy holder and your college savings accounts have been decimated, tapping into the value of your life insurance policy can make sense, experts say. Returns on whole life policies have been relatively decent, 3% to 5% over the past 15 to 20 years, says Feldman.
Another plus: Borrowing money from a life insurance policy currently offers some of the best loan deals. Interest rates range around 4% to 5.5%, variable or fixed depending on the policy, says Scott Moffitt, a consultant for life insurance companies who trains agents in college funding. In contrast, the federal government's Parent Plus loan has a fixed rate of 7.9%. True, private lenders are offering variable rates as low as roughly 3% but few parents can qualify for those loans since they require pristine credit. With life insurance loans, there are no credit checks.