Education Funding
Education makes a person better. It helps one earn more money, makes
people more useful to the society. But the “education,” especially good
quality, at fine institutions is expensive, and is getting more and more
expensive, day by day. Investing funds, for the use of children, for current
and future educational expenses has to be, hence, very prudent.
I will try to narrate my approaches, that I have used for my clients, and
my own children and grandchildren over the last 35 years or so.
I will describe them under 3 different headings:
- Life Insurance
- Education IRA
- College Savings Plan
Insurance: Whenever a child is born to a client, a
prospect, a family member, etc., I rush to set up a life insurance on the
child called juvenile insurance, within 3–4 months of the birth of the
child. Many a people do not like the idea of buying insurance on the life of
a child, and hate to think of profiting from the prospect of death of a
loved child. But I generally succeed in setting up a $100,000 juvenile life
insurance policy on a child, who is less than 1 year old.
The premium would be about $5 per month. But I ask the parent to overfund
the policy by paying $100 to $200 per month. In 5 years, by paying $10,000
or so, the policy is paid for life. The life insurance, due to accumulated
cash value, may become worth $500,000 or even $1 million, by the time the
child is 22 years old, has finished college, has a job, is planning to
marry, and needs to buy life insurance, if premium payments are continued.
The policy can be surrendered, and the cash value, could be about $25,000
at age 18 of the child, can be used to pay for college tuition. The premium
payment can be suspended for 4–6 years, until the child has a job, say
around age 24–25, and he/she then can resume premium payment, increase the
value of the policy, withdraw funds to buy a car, get down payment for
buying a home, eventually turn it into a tax-free retirement plan for age 65
onwards, and create huge financial legacy for heirs, charity and posterity.
The premium paid at age 1 of the child remains same until age 121. There
is never a medical exam, and any adverse medical conditions that may develop
over the life of the child will never matter, as it is a continuous policy
from age 1 to age 121, if one can manage it properly.
Savings Account: The Coverdell Education Savings IRA,
also known as ESA, Education Savings Account, allows parents and others to
put a maximum of $2,000 per year per child/student. The funds are not
tax-deductible but grow tax-deferred and can be taken out tax-free, both
principal and earnings. The account eventually belongs to the child, and the
ownership is transferred to the child at his/her age 18.
This plan is available in all States of the Union. The beneficiary on the
account can be changed before the child turns 18, and the funds can be used
for the expenses of the school, including private schools, as well as for
the college. Amounts not used for educational purposes are penalized.
The accumulation of $2,000 a year to even age 18 will not generate enough
funds to send a child to Harvard, Yale, or Stanford. Hence more funds need
to be invested to fund a college education properly.
College Plan: College Savings Plan(s) are also called
529 Plans (IRC, Internal Revenue Section 529) and vary from State to State.
One can put $250,000 or more, in several installments, for each child into
the plan to generate enough resources to take the child through 4 or more
years of undergraduate and graduate school(s) at the finest of institutions.
Some states provide limited tax advantages, if the parents keep the funds
in their own state’s 529 plan. Parents can, however, ignore this trap and
put their funds in the best state’s plan and with the best custodians. We
are allowed to invest in the 529 of any of the 50 states of the Union and
use it in any state’s school where the child goes to study.
The funds are not tax-deductible, with certain exceptions, but grow
tax-deferred and come out tax-free if used for college education. Not using
the funds for college funding will trigger penalty by IRS. The beneficiary
on the plans can be changed by owners/parents.
Final Thought: Any of the 3 plans outlined above will
destruct itself, if funding is not continued for a sufficient number of
years. Hence parents need to have adequate life, disability and other
insurance policies and enough savings, to cover the payments.
Many a times it is better to set up the 529 plan in the name of parents
themselves, even if they do not plan or need to get continuing education,
and eventually transfer funds for the benefit of children or others as and
when the needs arise. This is a smart estate planning tool also.