My husband and I divorced last year and then he died suddenly and unexpectedly a few months later.
I was an at-home mom and had just returned to the work-force so my salary is low, under $30,000 per year. My daughter is 16 and receives a monthly social security survivorās benefit which is deposited into my checking account and is spent on her living expenses. This benefit will go directly to her when she turns 18 which will be the autumn of her senior year. I received a life insurance payment that was used to buy a condo so weād have a decent place to live and could afford monthly expenses, so I have high equity. I have a small savings and small retirement account. There is another life insurance policy of $100k and my daughter is the beneficiary and will receive the payment when she turns 18, a few months before weāll be completing fafsa/css (The thought of an 18 year old in charge of that much money is terrifying to me but there it is). Iām so grateful that sheāll have money to use for school.
D is a sophomore so I know itās early, but Iād like to have a good understanding of the financial situation before she starts narrowing her colleges next fall. Iāve searched for social security info and it looks like, because itās not taxed, that it is not reported on fafsa but Iām not clear whether itās reported on CSS Profile as income.
Iām also unclear on the life insurance payout - since it will be disbursed in the reporting year is it counted as income or asset or both? I know it will be assessed at 20% for financial aid purposes and have completed some net price calculators including it as an asset only which give an EFC between $20,000 and $25,000. Does that sound about right or could it be even higher? Without the life insurance, weād be 0 EFC on fafsa. D is interested in high priced LACs and so far has the stats to get in. The thing is, Iām not sure that spending the entire life insurance benefit on undergrad is the wise choice, especially if she decides to attend grad school. In the end, itās her money and her choice, I just want to give the best advice I can and put her in the best financial position possible.
The life insurance thing is tricky. Iāve had similar experience with a minor who was a beneficiary of a life insurance policy. In order to prevent a one-time payout and dump a large amount of money on a young adult, I requested an annuitized payout, which also had the benefit of paying guaranteed interest at a decent rate. I selected an annuity that made monthly payments through the studentās college years, so that the money was available for higher education and related expenses. Any interest on the death benefit is taxable income, but the portion of the annuity payments that represent the death benefit is not taxable. Hopefully if the insurance company is holding your daughterās benefit until she turns 18, interest is being paid.
As far as financial aid goes, Iām still not totally confident that I have the right information. I contacted FAFSA support twice and asked if a life insurance death benefit was reportable as income to the student/beneficiary, and both times I was told that it was not. However, I received conflicting information from a college financial aid professional. Of course, once the benefit is received and if it is on hand (i.e., it has not been spent) at the time of completing FAFSA, it will need to be reported as a student asset. The advice I was given from CSS support was that the full amount of the life insurance payments needed to be reported as income for the year received; the death benefit portion as untaxed income in question SI-160, and the interest as income in question SI-135. Obviously this presents a conflict between FAFSA and CSS, but I have written documentation of the guidance provided to me by FAFSA support.
Thanks for the reply. I donāt know much about annuities so Iāll have to look into it. I only have a vague notion that theyāre not good - not sure where I got that idea. Doling out the money in smaller amounts to an 18 year old would make me feel better, though.
So, it sounds like the CSS would count the life insurance as income for freshman year financial aid and then count it again as an asset? Yikes. This is worst-case scenario for sure. I canāt even imagine the EFC in that case - I assume my daughter would be close to full-pay at the schools sheās interested in. Sheād be broke in 2 years.
When I say āannuitized,ā I simply mean that the death benefit is made in equal monthly payments over a period of years, with interest being earned. Itās not anything like an investment or retirement annuity based on life expectancy or something complicated like that. There were no fees to set it up, and payments are made automatically every month by direct deposit.
I had a heck of a time dealing with the insurance companies (two of them) at first to get a handle on the death benefit payment options. Nobody seemed to know anything specific, and it got very frustrating. I had one of the original policies/contracts, and I finally asked for and was provided with a copy of the original policy/contract from the other company, and I read them carefully and figured out what the options were. Once I knew what the beneficiaryās options were, it was relatively easy to do an analysis and pick the payout option that worked best.
I just donāt see an insurance payout being income in any way but thatās my opinion. Itās certainly not taxable and just doesnāt fit the category of income. It definitely will be counted as an asset. I suppose a school regarding their own financial aid can treat it how they like.
One thing is that for fafsa, if your AGI continues to be under $50k and if you can file a 1040a vs. a 1040 or your daughter gets free or reduced lunch or one of the other qualifying programs, you would qualify for the simplified formula and neither your nor your daughterās assets would be counted toward the EFC. Fafsa just qualifies you for federal and sometimes state aid. But there are also private schools that award their own aid based on fafsa alone. Those schools donāt tend to give a lot of aid, but in your case you may get more aid from those schools than from the schools that use CSS profile or their own form even though those schools are known to give better aid.
You can always look at what you would be gaining, instead of what you are losing: how wonderful that her father gave her this insurance policy to pay for her education.
I wanted to make sure that it was being reported correctly on both FAFSA and CSS, so I made written inquiries of both. Hereās how it went with CSS:
Me:
The student is the beneficiary of a life insurance policy that started paying out in 2013 after the death of the insured person. Instead of taking a lump sum benefit, the student elected to take the benefit in 60 equal monthly payments over five years, earning interest. The interest paid each year is taxable and included in the studentās AGI. Is the part of each monthly payment that represents the death benefit reportable on the CSS Profile form? If so, where is it reported?
CSS:
*Hello XXXXXXXX,
Thank you for your email regarding the CSS PROFILE. You should report the death benefit received as untaxed income in application question SI-160 (Studentās 2014 Income & Benefits). The interest paid each year should be reported in application question SI-135 (Studentās 2014 Income & Benefits).
Should you need any further information, please do not hesitate to contact The College Board.
If I understand the situation correctly, the daughter will have enough money to cover any EFC. It would be no different if I worked my tail off for 20 years saving for college because the EFC would take that money. No difference really.
I donāt trust any helpline or support. I think Iād make multiple inquires to see if I get consistent answers. Iād certainly explain it in the other circumstances or whatever itās called part of the CSS.
@annoyingdadā, I own a condo so I file 1040 (mortgage interest deduction, property tax, etc). My daughter does qualify for reduced lunch and I donāt see my income increasing by $25,000 in the next 2 years.
@KKmamaā, I hope I didnāt give the impression that Iām upset that her beloved father left her money for school. Iām beyond grateful. Iām simply trying to figure out how to make the most of the money. In the last 2 years my girl has lost her parentsā marriage, her father, her home and her friends and school due to the necessary move but her grades are stellar, test scores high and motivation and desire to go to an excellent school have not diminished. Iām certain that any parent here would want to help their child through this.
Yes, she will have enough money to cover full pay the first year and part of it the second year. After that the money would be gone. How would something like that work when filling out financial aid forms in the third year? Does a school take into account the drastic change in assets? Would there be a possibility sheād have to transfer?
To be clear, thatās if she attends a LAC, which she is most interested in. If Iām looking at this correctly, she needs to look at state schools to be able to pay for 4 years.
Thank you @MiddKid86ā for posting that info. So, with the annuity, does that mean that the benefit is looked at in fifths and counted as $20,000 income per year in my daughterās case? They donāt count the full amount as an asset?
Your daughter needs to apply to several different kinds of schools and see which work out best. An in-state public safety, she would probably get some Pell if assets arenāt counted, work study and maybe some state aid. Also apply to more generous schools that use profile or their own forms. Also try some fafsa only privates like I mentioned above, that aid may turn out to be better if the assets arenāt considered.
Given MiddKidās post and that your daughter is a sophomore Iām thinking it would be better to get the lump sum now and not have any of it being paid out during the college years or next year which will be the base year for her first year in college.
The other thing may be to fund a 529 account. Iām not up to speed on the technical details of that but others may comment on it.
Thanks @annoyingdadā, I appreciate your help. Do you have any insight into social security benefits and whether those payments are reported as income on CSS? Iāve read conflicting reports, some saying that it would be calculated at 50%. She will receive the survivorās benefit until hs graduation so, for her freshman year, that would tack on $4,000 to the EFC, if true.
You should find out what all of the payout options are for the insurance payout that your daughter is due to get. Can she get it now, instead of later? Or later instead of now? Can she turn it down and have you get the proceeds instead? Can she take a gap year for the payout and then give you the money instead of holding it herself? There are a lot of alternatives, if one has the whole story.
I guess you canāt file a 1040A with a condo/property and get your income down to simplified or auto zero for FAFSA purposes.
The fact of the matter is that there is no school that guarantees to meet need as defined by FAFSA EFC so that even if you can get shelter the assets for FAFSA purposes and get an auto zero EFC, institutional methodology and CSS PROFILE will likely come up with a heavy assessment on the money. SOme of it MIGHT be able to be mitigated, but you need to go through all of the scenarios and alternatives to see if it is possible.
The pay out, even if from an annuity, will never be income. It is an asset if held on the day of filing FAFSA but never income. The FA officer is wrong that itās income. It is no different than if someone handed her $100k or $20k or paid a bill for her and that might have to be reported, but it is not income.
@cptofthehouseā, thanks for replying. Iām not sure of all the options for payout - I was under the impression that lump sum at 18 was it. She canāt get it sooner, they will not distribute to a minor unless the court is petitioned and I pay for a guardian ad litum. Parents can not be the guardian of the minorās financial interests. We considered petitioning so the money could put somewhere to make more money for her but it doesnāt make sense in the relatively short time frame. I believe that even if she left the payout with the insurance company after she is eligible to receive it, it is considered her asset and must be reported. She cannot put it in my name - I believe thatās illegal, plus itās her money, not mine.
Iām not trying to avoid paying for college or get full financial aid, Iām trying to understand how far this money will go at different types of schools so I can guide my D to the ones where she can get out after 4 years with the least debt.
My biggest concern is that the payout will come in the financial aid reporting year and be counted twice - as income and as an asset at 20% - which translates to an EFC of $40,000 in freshman year.
@twoinanddoneā, thank you. Iāve had so much conflicting information regarding her payout. Iāve read everything her and everything I could find on an Internet search. Some people say itās reported as income in the payout year (even though itās not taxable) and as an asset. If that info is correct, with the payout year being the freshman financial aid reporting year, that would mean the $40,000 EFC. If itās not reported as income and only as an asset, that makes the EFC $20,000 freshman year. That would make a difference in the schools she should consider. I hope Iām making sense - just want to have a clear understanding of all this.
