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Use Caution Before Using Insurance or Annuities to Reduce EFC

caution with EFCThere are a lot of financial advisors out there who are anxious to sell you insurance, annuities, 529s or other financial products in the name of helping you lower your college costs. Annuities for college education are not always the best idea.

The advice I always give people is to do their homework before they act on any advisor’s recommendations. Not doing your homework on annuities for college fund can actually end up costing you much more, not much less for college.

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Annuities are usually not a good strategy for middle-income families to reduce college costs

Last year a client came to my office and proudly announced that he had recently put $150,000 of his non-retirement assets into an annuity. His financial advisor told him that annuities are not assessed to determine his Expected Family Contribution (EFC) and that, by making this move, he would reduce his college costs by $7500.00 a year.

His daughter, however, had decided to enter Washington University at St. Louis in the fall and I had the unfortunate task of telling him that his annuity was actually not going to reduce his college costs at all. That’s because Washington University, and all other schools that use the Institutional Methodology, actually assess unqualified annuities.

Even if his daughter ended up at a college that did not assess annuities, there is another problem with the advisor’s annuities for college education solution. It looked like he might run short of the savings he had set aside for his three children and if he had to tap into his annuities for college fund down the road, there would be a 10% penalty for removing the money.

An expensive but important lesson

The lesson here for my new client is that he should either have done his homework or only worked with a financial advisor who understands all the rules and regulations that affect a family’s contribution to college.

Though annuities may be an appropriate investment diversification strategy for clients who have most of their money at risk, they should never be recommended as way to reduce a family’s EFC if there is any chance that a student may be attending or transferring later to a college that uses the Institutional Methodology. Annuities for college education are not a particulary good plan.

What About Life Insurance?

As far as life insurance is concerned, it may be appropriate, but only under these conditions:

1) The policy must be designed to provide liquidity so the money is available when necessary to pay for college.

2) There must be a genuine need to shelter assets from assessment. For example, it should not be offered as an EFC reduction strategy to clients who have not exceeded their asset protection allowance.

3) There must be no surrender charges or penalties for policy loans to pay for college.

4)The client must have a genuine need for the additional insurance coverage.

It is also appropriate for an advisor to present a properly designed insurance option as an alternative to 529s if their students may be attending a college which uses the Institutional Methodology. That’s because colleges using the Institutional Methodology may now treat distributions from 529s as untaxed student income.

Don’t Use Advisors who will limit your options

I believe it is also important to stress that families only use financial advisors who have all the required licenses to implement solutions that are most appropriate to their needs.

For example, I would be reluctant to use an advisor who is only licensed to sell insurance or annuities just as I would also be reluctant to use an advisor who is only licensed to sell mutual funds, stocks, or other financial products.

Finally, the advisor you use must have a fiduciary responsibility, not just suitability. This means they must provide holistic solutions and always act in your best interest.

So always work with advisors who are licensed and authorized to evaluate all types of financial solutions and to provide you with clear explanations on how those solutions will impact the cost of college and your retirement picture.


Bob Proctor, CFP

Bob Proctor, CFP

Bob Proctor is the owner of Shamrock Financial Planning in Naperville, IL. Shamrock offers comprehensive financial planning along with securities and advisory services. He is a Certified Financial Planner (CFP) and a Chartered Financial Consultant (ChFC) with over 25 years in the financial services business.

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