Aug 7th, 2010 | Written by daniel | Posted in Investing |

Life Insurance Policies

In today’s world, college education is extremely expensive and the only way most parents can cope is if they start to save early and in the case of a college education saving early means from birth.

If you work out that a college education will cost $54,000 and you start to save on your child’s birth and you only have to save $3,000 a year or $250 a month. However you start to save two years before college and you have to pay $27,000 a year and that works out at $2250 a month. These figures are of course ballpark figures illustrating a mathematical point they do not take into account compound interest.

Unfortunately long term savings creates interest which is regarded as an income and this is subject to both Federal and state income taxes. The more the college fund grows the greater amount of tax owed.

There are ways of getting out of this income tax liability one of the primary ways is to save money in your child’s name is children have no other income they avoid tax liability altogether or owe a very small amount. The obvious problem here is that if you place money in your child’s name they then own that money and they can spend that money in any way they choose.

Using 529 State sponsored College Plans is another method offered by private investment companies. They do offer tax advantages that they can have other restrictions as well. Every state office these plans but some states offer greater tax advantages if you choose the one in which state you live.

The best protection is life insurance on a child. There are three parties to this contract – the insured which is your child, insurance company and the beneficiary. Parents can make themselves the beneficiary of this policy because the child is a minor. One of the advantages of purchasing life insurance to fund a college education is the fact that for a healthy child you can get a very large premium for a very small amount of money. Present legislation ensures that the income generated from a life insurance policy is not taxable.

Once the child is ready for college, it is a simple matter to cancel the policy and withdraw the cash value. However, this is not necessarily the best way of acquiring the cash; parents can keep the policy and borrow against its maturity figure at a very low rate of interest. It may be that your child does not want to go to college you can still use the cash you have the option of transferring that policy to the child but it is not mandatory.

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