Parental Life Insurance while kids are in college

Paying for College
1

<p>A friend of mine with two children, one in college and a senior in HS, lost her battle with breast cancer this week. I don't know what their financial situation is re: paying for college, and the mom wasn't the primary wage earner in her family, but it did get me to thinking about life insurance and paying for college...</p>

<p>I'm wondering if parents of college kids on need-based financial aid need to think about life insurance differently.</p>

<p>Suppose the primary wage earner of the family dies leaving a lump sum term life policy payout intended to support the family and make up for the loss of that parent's income. If this happens while they have kids in college, it seems like it would be seen as "an asset" for financial aid purposes and get eaten away at a faster rate than was planned for leaving the family in a bind (particularly if there are many years of paying for college left). </p>

<p>I know people will say, well they would be lucky to have the asset they could use to pay for college, but they would also need the asset for other expenses. </p>

<p>I'm wondering what are the impacts on a financial aid family (not a zero EFC family) if the primary wage earner dies leaving a lump sum of life insurance once there is already at least one child in college:</p>

<p>1) does the life insurance payment count as "income" in the year received?
2) other than that year at least, I assume the money is an asset and not income, so income drops substantially, but assets increase
3) family size decreases</p>

<p>Are there ways to structure a term life policy so that it does not pay out in a lump sum? (I suppose asking one's insurer is best, but I'm curious right now as to what is possible/advisable in general.) I know you could buy an annuity, but presumably that would still all be an asset. </p>

<p>Supposing a family cannot increase the amount of term life they carry to cover full freight for college for all their kids, are there good ways of ensuring that the money lasts as long as intended to help support the family? Ideally the family would be able to keep paying approximately the same amount toward college as before, but not substantially more.</p>

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<p>That is exactly what life insurance is for, and nothing else: to replace lost wages to continue supporting those you support in life. If you are single, you don’t need life insurance because you don’t support anyone. Once your kids are out of college, you don’t need life insurance to pay them, as they will have their own jobs. Once you are retired, you need life insurance only to continue money you get from things such as Social Security for your spouse.</p>

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<p>Generally, annuities are only good for retired people. </p>

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<p>The will could stipulate the money be placed in an education trust. Ask a financial advisor. Do not ask an insurance salesman, as they want to sell you something.</p>

<p>Overall, a life insurance policy payout is not something to consider with college financial aid other than to guarantee the kids get the money you would have been making if you were still alive.</p>

3

<p>My concern is that the school would want the kids to pay full freight because “hey, look at all the cash you suddenly have” and that would take too big a chunk out of the insurance money so that it wouldn’t be around as income replacement as intended for all the family’s other needs.</p>

4

<p>You could ask your insurer about having the method of settlement be a “fixed amount” or “fixed years” method. For example, if you have a $500,000 policy but the person you are insuring has a $50,000 income. You could set up the beneficiary to receive the money over 10 years or $50,000 per year so as not to have a huge influx in one year.</p>

5

<p>We kept high life insurance while our kids were in college so that they would NOT need to worry about paying for college if something happened to one of us. In other words, our life insurance was FOR college costs.</p>

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<p>Because of an adverse medical event a few years ago, I can’t increase my life insurance right now, so that’s not an option.</p>