In perusing the threads on this forum, this topic seems to come up quite a bit. The consensus seems to be that, on balance, it’s not a good idea except in certain situations. I’m wondering if I’m in one of those situations.
My wife passed away last year (my son’s base year for the FAFSA) and I received a life insurance distribution that I parked temporarily in a brokerage account. A college funding advisor has informed me that in my case it makes sense to invest this money, plus some of savings, into a cash value account so it doesn’t count against me in the EFC calculation (yes, I’m sure he gets a commission, though that in itself doesn’t mean it’s not a good idea). At least part of this money must remain liquid—I’ll have to draw on it each year to pay for the difference between what the college offers in aid and the remaining cost. My income is decent but under $100,000, but on paper my assets make me look wealthier. I don’t own a home or business, but I do have both my own IRA/401(k) accounts plus now my wife’s, along with the life insurance distribution and some savings and two modest-size 529 accounts (one for my son and one for my daughter–she’s going to community college so doesn’t really factor into this because the costs are so low, while my son is anticipating going to an expensive top-flight college). The question, I guess, is: will the positive impact on my EFC by moving my money to this account outweigh the disadvantages (from what I can tell, basically earning little to nothing on that money over the next 5 years or so)? My inclination right now is to not do it—rather, instead move part of the money to other accounts, such as a Roth IRA or even my IRA.
Any advice? Thanks in advance!
Before you do anything:
1- condolences on your loss. So very sad for all of you.
2- How old are you? And are you in good health, and do you have your own life insurance policy-- and is it enough to take care of your kids if god forbid something happens to you?
3- How secure is your job?
Then- run the NPC’s (Net price calculators) for one of the “best financial aid schools” in the country- Princeton. Not saying your S is interested, or can get admitted. But run the calculator with the life insurance distribution in a brokerage account (assume for the sake of argument that you’ll keep 1/3 cash, 1/3 in bonds, 1/3 in stocks, not that it will matter for the NPC) and then run it invested the way your college funding advisor is recommending.
Then do the same exercise at a less generous school that your S may actually be interested in and can get admitted to easily.
Now you know the impact of the money at the most generous college in the country and a more realistic/typical college. My very strong suspicion is that it won’t make as big a difference as you think. The formulas are weighted towards income-- at a less generous school you are likely not getting much aid from the git go, so your assets in the brokerage account won’t move the needle substantially. And at the uber generous schools- where YOUR IRA, 401K, and the inherited IRA from your wife (which I’m assuming are the bulk of your assets to begin with) won’t count against you… again, the life insurance money isn’t going to move the needle.
Come back once you are done and the collective wisdom on CC can help you… but I’ll bet you coffee at Starbucks that doing what your advisor suggests is a bad financial move AND doesn’t change your aid situation all that much AND gets someone a commission on a really bad investment.
Condolences.
TIAA-CREF has a no-load universal life insurance product that might accomplish what you are trying to do without losing all of that money to commissions and surrender charges. I think you can eventually repatriate the money via a tax-free exchange to a variable annuity and regain some of the earnings power of the capital after college is over.
Sorry for your loss.
Thanks for the replies—not surprisingly, they’re mixed. I will indeed run the numbers, blossom, and I suspect you’re right. I do indeed have a life insurance policy through my work, and my health is good; I’m in my mid-50s. In short, no, I don’t need another policy; my kids will be financially OK if the worst happens. I have prepared a long list of questions for the financial advisor, now that I’ve had time to do some research, to get into the weeds on this policy, and what exactly he’s getting out of this. Even fixed-fee advisors who generally consider this a bad strategy on occasion recommend it. But I will move very cautiously. Thanks again for the suggestions and your sympathies.