skip to Main Content

Use Caution Before Using Insurance or Annuities to Reduce EFC

There are a lot of financial advisors out there who are anxious to sell you insurance, annuities, 529s, and other financial products in the name of helping you lower your college costs. Using these for a college education is not always the best idea.

I always advise people to do their homework before they act on any advisor’s recommendations. Not doing your homework on annuities for college funding can end up costing you much more.

« Learn more about financial aid

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 doing this he would reduce his college costs by $7,500.00 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 solution. It looked like he might run short on the savings he had set aside for his three children. If, at any point in the future, he needs 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. This strategy  should never be recommended as way to reduce a family’s EFC. There is always a chance that a student attend or transfer to a college that uses the Institutional Methodology. Because of this, annuities for college education are not a particularly 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 that 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

Families should only use financial advisors who have all the required licenses to implement solutions that are most appropriate to their needs. This is extremely important! You want to work with someone who actually save you money through their services.

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.

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.

Jim Kraiss, CFP

Jim Kraiss, CFP

Jim Kraiss has been a Certified Financial Planner (CFP) for over 29 years. He has taught financial planning at several area colleges, written multiple financial planning articles, and authored five books on the subject. With his expertise in designing non-assessable financial instruments for college funding and his previous long-term experience as a Series 7 and Series 63 securities advisor, he has been able to design unique multi-advantaged solutions for our clients.

This Post Has 0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top
×Close search
Search