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  • Consumers Beware: The Truth About Life Insurance, Annuities And College Financial Aid

    November 5, 2014 by Troy Onink

    There are so-called college advisors lurking at college aid nights at high schools across the country who are really just insurance agents aiming to sell unsuspecting parents life insurance and annuity products on the claim that it will get the parents’ child more aid for college. Some of their claims and practices border on outright fraud, so consumers beware. They are not offering college funding advice. They are peddling “product commission advice.”

    With that said, there is a time and place for almost everything in life, and sometimes for college funding purposes life insurance can be a perfectly suitable and prudent option. That is not the problem here. The problem is when these so-called advisors recommend annuities and life insurance when it is totally unsuitable, often justified with smoke and mirrors financial aid half-truths.

    Here are two reader comments asking for clarification on annuities, life insurance and financial aid that are glaring examples of bad college advice.

    Do the colleges distinguish between fixed and variable annuities in the student’s name? I understand FAFSA doesn’t require stating any annuities. What about the CSS? Or any of the methodologies. An advisor said it was better to put our daughter’s UGMA accounts into fixed (particularly equity index annuities) vs. variable, and I cannot find any support to this. He insists that more selective colleges will ask about variable and possible consider this an assist. Why would they ask about variable more than fixed? What are the rules about disclosure of any annuities, fixed or variable on the CSS? Many thanks for any clarification!

    Does college savings have any effect the award of merit aid for a student? We are in the process of preparing my son to go to college next year and have hired a college planner to help in the process. By and large we are happy with the services provided, with one exception. She is trying to get us to cash out our 529 plan and invest in a whole life insurance policy, telling us that sheltering this money will help him get more merit aid. We are not eligible for any need based aid.

    Ladies and gentlemen, this “advice” is not only highly incorrect, it is an intent to mislead these good parents in the hope of making a sale and a commission.

    What College Funding Advice Should Be

    College funding advice should be about your family’s best strategy to maximize financial aid eligibility and tax savings in the process of paying for college, so that you can preserve as much of your hard-earned assets and income for retirement and other purposes. Even if you can write the check for sticker price at the college of your child’s choice, you would probably prefer to know if there is anything you can do to reduce your out-of-pocket cost, and pay that cost as wisely and tax-efficiently as possible. Right?

    You are not alone, and that healthy desire to be a good steward of the resources you have is what leads most parents to college aid nights and college advisors. You are right to go and seek advice, especially if your own financial advisor doesn’t know much about college funding and may not have offered any advice beyond how to save for college. So let’s set the record straight on saving for college, life insurance, annuities and college financial aid.

    How Annuities And Life Insurance Are Treated On The FAFSA and CSS Profile

    Sometimes having money in your child’s name is not bad, but at other times it can definitely lower the child’s aid eligibility. So when parents or their child have saved for college (or anything else) in the child’s name, they are sometimes advised right before the child goes to college to cash out the child’s existing accounts and put the money into an annuity or life insurance contract because those types of accounts are not reported on the Free Application For Federal Student Aid, the FAFSA. Annuities, however, are in fact counted as an asset on the CSS Profile, the other aid form that about 200+ colleges, mostly private, require in addition to the FAFSA when assessing a student’s eligibility for their own institutional financial aid dollars.

    This is important because the information on the FAFSA and the CSS Profile is used to determine the student’s expected family contribution (EFC) toward the cost of college, and a college’s cost of attendance (COA) – the student’s EFC = the student’s eligibility for need-based financial aid.

    So, while it is true that life insurance cash values and annuities don’t need to be reported on the FAFSA, as previously stated, non-qualified annuities are counted as assets on the CSS Profile. Therefore, the annuity approach “might” work to qualify for federal student aid, but definitely will not work for all colleges’ institutional aid dollars (i.e. The “good stuff” — grants and scholarships that don’t need to be repaid).

    Your Income May Disqualify You For Financial Aid regardless OF Where Your Assets Are

    More importantly, and as often is the case at most state universities, if the parent’s income is too high to qualify for need-based financial aid anyway, then moving the child’s assets or parents, into life insurance and annuities won’t help the child qualify for aid.

    For example, if the expected family contribution (EFC) is $25,000 per year and the child has $20,000 in her savings account, then 20% of the child’s $20,000 is adding $4,000 to the family’s $25,000 EFC. So if the family puts the child’s assets into an annuity so that they won’t be reported for aid purposes, the family’s EFC will drop from $25,000 to $21,000 per year. However, if the child stays in-state and attends a state university that costs $19,000 per year, the cost will be less than the family’s EFC and the child still will not qualify for need-based aid.

    Conversely, if the cost of the college is say, $30,000 per year and the family’s EFC is $25,000, then the student will qualify for $5,000 in aid to begin with, and by moving her assets into an annuity she will qualify for $9,000 in aid at colleges using the federal methodology because her EFC will drop by $4,000 per year because the $20,000 in assets are not being counted at 20%.

    However, if the family needs her money to pay for college, then it will show up the next year as a distribution from the annuity and the scheme backfires. Moreover, you may have to pay penalties to get out of the annuity. Furthermore, even if the student does qualify for $4,000 more in need-based aid by stashing the assets, the college may merely “fill” that additional $4,000 of financial need with a Stafford loan that has to be repaid, or worse, may not fill that need at all; there’s no guarantee on what you will get at most colleges. So what have you achieved in the end?

    There’s a time and a place for most things, but stashing the money from your child’s savings account, or your own, into an annuity is often not advisable, especially when: 1) here are limited other sources of funds to pay the family’s share of college costs, 2) there are other ways to soundly reduce the impact on aid eligibility, 3) it doesn’t work at colleges that require the CSS Profile form in addition to the FAFSA, and 4) not knowing what form of aid, if any, the student will receive just because the child may technically qualify for it.

    Not All College Advisors Are Created Equal

    To help you understand where I am coming from on this issue, which is the complete opposite end of the spectrum than these so-called advisors, I think it is important to have some background on me and how I think families should be advised on paying for college. I have been specializing in helping parents determine their best strategy to pay for college for over 22 years. While my focus has always been on college funding advice, I have worked as a financial advisor, consultant, mutual fund company executive, author, speaker and now advisor and blogger on this topic. My approach to providing college funding advice requires a focus and a depth of expertise in four key areas: College Admissions, Financial Aid, Tax Aid (tax-savings strategies) and Personal Finance. What’s more, you have to be able to understand how each of these areas impacts the others, the many nuances of the college aid system, how taxes and college financial aid play off of each other, and everything else that investment managers, CPAs, college aid and admissions officials know, too.

    No, that absolutely does not make me a know it all, but that is how to integrate all of these areas into a best strategy for the family, which is what I do for clients and what I help other financial advisors and firms do for their clients, too. That is my way of providing the best advice I can, hopefully in total contrast to the best commission approach this post is about. I thought you should know the difference so that when you go to seek advice from an advisor you know there is a lot more to valuable college funding advice than how to save for college and fill out the FAFSA. There are good advisors out there, despite the bad apples.

     

     

     

    Originally Posted at Forbes on November 4, 2014 by Troy Onink.

    Categories: Industry Articles
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