Last week, I attended the wake for a friend’s brother. While I was very sad for my friend, I couldn’t help but think of his now-widowed sister-in-law and her sever (7) year old son. What about their future?
When it comes to college savings, people talk about 529 plans, financial aid, loans, etc. And most people think the typical discussion goes something like this: If you save $x per month in this plan earning a hypothetical y%, you’ll meet your savings goal by the time little Johnny or Sally goes to State U.
And if it was hard to find the money to save for college when there were two incomes, it’s darn near impossible with only one income.
So what’s missing? How about a self-completing college savings plan?
Huh? What’s that?
The answer: Life insurance. What’s life insurance got to do with college savings?
Think about it? What is your greatest asset? Your house? Car? No, it’s your ability to earn an income. We can’t clone you but we can replace the money you’ll make in your lifetime.
Life insurance, with sufficient proceeds, is the only way to guarantee that little Johnny or Sally has the money to go to college. Getting into college academically is another story.
I doubt your boss would increase your salary just because your spouse died. And there are no financial aid programs specifically for widows.
But I already have life insurance through work.
True, many employers offer group term life. Most companies cap this at 1x income or $50,000 (Why? Income tax treatment of the premiums for the insurance.)
So let’s think about this. Spouse dies, you get $50,000. Average final expenses can be up to $20,000 (funeral, buying casket and burial plot, legal expenses, etc.). So that leaves you with $30,000 - barely one year at a private college.
And don’t forget – you only have it as long as you are part of the group. If you get fired, laid off or retire, you aren’t part of the group. And no guarantee that the next company you work for offers group life insurance.
And in the case of this family that had the wake, the money could possibly get the son to age eight, but what then?
But group insurance is so cheap!
Is it really? Your age and health are averaged in with the other employees. If you are the oldest person with the worst health, then yes you are getting a raging bargain.
But if you are younger than average and/or healthier than average, then you are paying a higher cost than you could be. The insurance company has to take into account everyone in the group.
Just as you wouldn’t want to get into an auto accident without insurance, you don’t want to lose a college education just because a loved one passes away.
September is also Life Insurance Awareness Month. And quite frankly, most people have no clue as to what life insurance is, how it works, or why it is the most important part of family finances.
This week’s trivia question: In the popular press, 529 plans are a great way to save for college. When your child finally gets there and you take money out of the 529 plan for college expenses, are the distributions?
A. Income tax free
B. Considered taxable income
C. Income tax free only to the extent of qualified expenses
D. Huh? I have no idea what a 529 plan is.
