Pay For College -- With Insurance?

The vast majority of today's parents are concerned about paying for their children's college education.

Small wonder.

The 1999 College Handbook reports that the average cost for a four-year education at a private college or university that began in 1999 was $104,488; at a public college, $48,495.

By 2017, these costs are expected to rise to $298,243 and $138,420, respectively.

Education IRAs are growing in popularity, but those tax-deferred accounts can't keep up with that kind of cost projections. With a maximum contribution of $500 a year, presuming annual growth of 10 percent, even if you started saving for an infant born this year, your investment would yield only about $22,500 by the time he or she is 18.

Clearly, members of the so-called sandwich generation have a lot on their mind -- between caring for aging parents, planning for their children's future and saving for their own retirements.

There is a novel college funding solution that could ease their minds.

Insuring Tuition

You might not be aware that someone who holds a variable universal life insurance policy can tap it for college education expenses without getting hit with taxes or an early withdrawal penalty -- and without jeopardizing his life insurance coverage.

Here's how it works.

• You purchase a variable universal life (VUL) policy with annual premiums, the same as you would with regular life insurance.

• However, a portion of your annual premium is applied to the life insurance protection and administrative expenses; a portion goes to the investment component of the policy.

• You choose how the funds in the cash account are invested from a wide array of investment choices.

Flexibility An Asset

In this way, a VUL policy is kind of like a variable annuity: Your money grows on a tax-deferred basis, and you may transfer money between investment portfolios without tax consequences. However, a VUL is far more flexible when it comes to withdrawal privileges.

Years later, when your child is college age, you may do a couple of things with your policy.

1. You can suspend your annual premium payments while he or she is in college.

2. You can take out a tax-free loan or withdrawal from the cash value of your policy. This means that you won't get hit with a penalty tax even if you're under age 59½, the way you do with other tax-deferred accounts. If you've held the policy long enough, you won't even have to pay income taxes on the money withdrawn.

Once your child has graduated from college, you may resume premiums and even choose to pay a higher amount designated toward paying off the loan. This will allow you to tap the account again later on when you need supplemental income for retirement.

Right For You? Maybe Not

Right off the bat, you should know that variable universal life is not appropriate for everyone.

It's definitely an expensive type of insurance and usually should be considered only when other tax-advantageous alternatives have been maxed out.

You need to have owned the policy a number of years and built up your cash value in order for it to work as a college funding plan.

Plus, you must have paid enough in premiums to prevent the policy from lapsing during years that you suspend payments.

The good news is, since this is a life insurance policy, proceeds are distributed tax-free. This means that you can avoid income taxes on money withdrawn for college expenses up to your "basis" (the amount put in) as long as the policy remains in effect until your death. When you die, your beneficiary will receive all proceeds tax-free. And VUL death benefits generally avoid getting tied up in probate.

As a general guideline, you may wish to consider purchasing VUL if you:

• Have school-age children

• Want a complete college funding vehicle in place should you die prematurely

• Are in the 28 percent tax bracket or higher and can afford it

• Doubt that your children will qualify for financial aid

• Need to tap your money before age 59½

Worth Considering

College expenses have been rising an average of 7 percent a year for the last 10 years. At this rate, college costs will double every 10 years -- much faster than the rate of inflation.

Variable universal life insurance may not be a cost-efficient first choice as a college savings plan, but if you already have some college investments in place, VULs provide a reliable supplementary or backup plan that also serves double duty as your life insurance coverage. Your best bet, though, is to start putting money away early and consistently and avoid having to play catchup.