Indexed universal life as a college-funding strategy


With the volatility in the market over the past few years, most clients understand the importance of saving and using a variety of vehicles to yield growth while protecting themselves from downside risk. What clients may not realize, however, is that they can use an indexed universal life (UL) policy to:

  • Help accumulate assets for the future in a tax-favored manner
  • Help minimize some of the tax burden on their savings
  • Guarantee the death benefit if needed and provide protection to ensure goal completion
  • Supplement the expense of a college education and more.



According to the College Board, earning a college degree can now cost from $52,000 to more than $130,000 -- and the cost is rising faster than the rate of inflation. Despite the spiraling price of attaining a diploma, society continues to promote the rewards of the pursuit of higher education.

  • Diversification and protection from downside risk
  • Tax-efficient ability and flexibility to access funds
  • Parental stewardship of funds
  • Income tax-free death-protection benefit* which also bypasses probate

Death benefit protection with added tax-deferred growth potential
Traditional life insurance plans provide clients with the security of knowing that should they die, their loved ones will be taken care of. With indexed universal life insurance, clients have this same level of security along with the opportunity to build tax-deferred cash value which can be accessed in the future for a variety of needs.*

Indexed UL plans are similar to traditional UL plans in that premium payments above the cost of insurance are credited to the cash value, giving clients an opportunity to realize growth in cash value accumulation. With an indexed UL plan, cash value accumulation is based in part on the performance of one or more external financial indices such as the S&P 500.

Newer indexed UL's on the market today also offer death benefit guarantees for shorter, limited periods (20 or 30 years) as well as for the life of the insured. Indexed UL policies allow clients to participate in the upside of the market while being protected from market volatilities with a minimum guarantee.

Diversification and protection from downside risk
Clients who intend to fund a college education in part through an indexed UL policy have the potential to be well-served by the product, which offers greater exposure to global marketplaces than solely the domestic marketplace. A product that uses multiple global indices offers potential for more growth and diversification than most other indexed UL products.

Global indexed UL policies provide an opportunity to realize greater growth in cash value accumulation based in part on the performance of those global indices instead of a single domestic index. When calculating index interest to be credited, these policies typically have three indices that are looked at over a set period of time with a greater weight given to the two best-performing indices while the third is usually not considered, thus offering protection from a downturn in the market.

Tax-efficient borrowing ability
With an indexed UL plan, parents can withdraw funds, in most cases assuming the policy is a non-modified endowment contract (MEC), on a tax-free basis through withdrawals or loans to help subsidize college expenses. Cash from an indexed UL plan can be used as a supplement to financial aid, but because of its status as life insurance, it will not deem anyone ineligible or impact financial aid calculations. Additionally, parents can put money back into the policy to continue accumulating assets for their own retirement or, for example, to help pay for their long-term care expenses.

Although an indexed UL policy is an especially attractive option for affluent clients with young children, it even holds appeal for grandparents. A product like this enables grandparents to access money from their estate income tax free, and shift ownership to their child (presumably a parent) for the creation of a college or retirement fund. In other words, the accumulated wealth can be spread across generations.

Help your clients stay in control
Unlike custodial plans, where control of the funds is transferred from parent to a child once he or she reaches a certain age (majority), an indexed UL policy enables the parents to retain control of the funds if desired -- assuming the parent is the owner of the policy. Parental control can be a compelling feature, as it is always possible a high school graduate will decide against going to college, or want to use the money from a custodial plan for another major purchase or life choice his or her parents don't agree with. Additionally, in case the parents were to unexpectedly pass away, they should also provide goal completion options for the children.

Within the confines of a traditional college savings plan, such as a 529 account, the money in the account must be used toward college tuition, fees, room and board, books and supplies, or it will be subject to taxes. In addition, the earnings from such an account -- and any excess money left in the account after paying for college -- can be taxed on both a federal and state level. Whose clients want to pay more taxes?

With an indexed UL policy, parents have the flexibility to access funds as needed -- not only for college funding but other major expenses -- while continuing to plan for future needs. For example, they can use the funds as supplemental income for a period of time, and then start placing money back into the policy for future use, such as their own retirement or long-term care expenses.

Educate clients on long-term strategies
The accumulation of funds inside an indexed UL product for college or other major costs is a long-term strategy. Experts typically recommend waiting 10 years and sometimes up to 15 years before withdrawing cash from an indexed UL plan.

This is not a design where clients are looking primarily for income replacement or a death benefit. Rather, they're intent on capitalizing on the opportunity for growth on a tax-favored basis. They typically strive to fund the policy at the maximum legal limit so they can leverage their current resources -- and the policy's exposure to the indices -- in a strategy to expand their nest egg while shielding against downside risk.

When you educate appropriate clients on the potential applications and benefits of indexed UL, in comparison to the variety of other vehicles available to fund dreams of college for a child, you guide them toward a sale you can both chalk up to smart thinking