Tuesday, June 28, 2011

How to Fund your Child's College Education the Right Way

Funding a college education at the rate that tuitions continue to rise can be extremely difficult for a single parent. For example, in Illinois the range for in-state 2010-2011 tuition and fees for a state University such as the University of Illinois at Champaign-Urbana is $13,640 while the tuition for a private university such as Northwestern University is $40,247. Other educational institutions in Illinois may have tuitions that maybe a few thousand dollars more or less. Each educational institution has to be evaluated on their own merits. 

Moreover a two-year junior college may be an option for the first two years. Or even forgetting the liberal arts universities altogether and choosing a technical or trade college maybe even the best option depending on your child's aptitude and interests.

Nevertheless, as a single parent you need to prepare to meet at least some of the cost of financing your child education. And, because your child is clearly dependent upon you, the value of life insurance is a must for consideration.

There are three major types of life insurance to consider: Whole life, Term, and Universal life. Whole Life offers a death benefit, tax-free guaranteed cash buildup, an opportunity to borrow money without any requirements, and proceeds distributed tax-free. Term provides for a larger face amount for the same premium but only for 10, 20, or 30 years. Some term plans allow for return of premium at the end of the time period which may be a good option to consider. Universal life is essentially a hybrid that encompasses the best features of whole life and term, is interest-rate sensitive, has a guaranteed cash value, and allows for flexibility in premium payment.

Here is an example of a whole life cash buildup of for a 38-year-old female single parent with a four-year old child. For a monthly premium of $97.06, a major life insurance company here in Illinois will provide a death benefit of $100,000 and $12,471 in cash value in 14 years. She can borrow this money without having to meet any qualifications and never pay it back if she chooses not to. The amount borrowed would just be deducted from her death benefit. While this loan will not fully fund the child's education, it would cover some significant expenses and would be self-completing by paying the beneficiary $100,000 if she passes away before the child reaches college age.

The other option which allows you to contribute to your child education is a 529 plan, however, this is considered an investment decision with both the benefits and drawbacks and no guarantees. Moreover, politicians can make changes in these plans as a matter of state legislation. And, as this is just an investment plan, it is not self-completing in the event of an untimely death.

All things considered a whole life insurance plan should be your major vehicle for funding your child education. If you choose a 529 plan to augment it, do your homework and choose very carefully.

Any thoughts? Leave your comments below.

Whole Life, Term, Or Universal Life Insurance - How to Determine What's Best For You

A whole life insurance policy covers you for your entire life. Your death benefit and premium in most cases remain the same. Whole life also builds cash value, which is a return on a portion of your premiums that the insurance company invests. Your cash value is tax-deferred until you withdraw it and you can borrow against it.

A whole life insurance policy may be used as a part of your estate planning. Consequently, whole life insurance is a good choice for you if you want to ensure that you have a life insurance policy in place for your entire lifetime and can comfortably afford the premiums, of if it fits within the framework of your estate or retirement plan.

Whole Life Insurance
While whole life insurance is designed to provide coverage on the insured for the insured's entire life as long as the premiums are paid and the policy has not been surrendered, term life insurance provides coverage only for a fixed period that is stated in the policy. It can be for one year or up to thirty years. Term insurance premiums are extremely affordable for a person in good health up the age of fifty. After that age, the premiums start to get progressively more expensive. Term should be purchased if you only need insurance for a specific period of time, such as if you want an outstanding fifteen or thirty year mortgage balance paid off in the event of an untimely death.

Universal Life
Universal life is a type of flexible permanent life insurance offering the low-cost protection of term life insurance as well as a savings element, like whole life insurance, which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered as a policyholder's circumstances change. In addition, unlike whole life insurance, universal life insurance allows the policyholder to use the interest from his or her accumulated savings to help pay premiums.

Universal life insurance was created to provide more flexibility than whole life insurance by allowing the policy owner to shift money between the insurance and savings components of the policy. Premiums, which are variable, are broken down by the insurance company into insurance and savings, allowing the policy owner to make adjustments based on their individual circumstances. For example, if the savings portion is earning a low return, it can be used instead of external funds to pay the premiums.

Unlike whole life insurance, universal life allows the cash value of investments to grow at a variable rate that is adjusted monthly. As an example, the Indexed Universal Life may base the performance of its cash values on one of several indices, including the S & P 500 or the Dow Jones Industrial Averages. Moreover while it provides an opportunity for growth, it has guaranteed returns and provides considerable stability. In that it provides both growth potential and a safety net, it is excellent for college planning or retirement supplemental planning.


Two Excellent Choices For Financial Safety and Security During This Era of Uncertainty


Although 401(k) s are beginning to rebound a bit, financial safety and security continues to be sought in America. In this context, traditional whole life insurance and annuities must be considered as an safe and secure options for acquiring sufficient money to have a satisfying retirement.

The long standing traditional whole life insurance lasts for your whole life and the premium remains the same as long as the policy is in existence. Traditional whole life insurance contains the basic essentials of term insurance, with an investment element added.

You pay a premium amount larger than the premium which would be paid for term insurance and that part of the payment is invested over the life of the policy. The growth of that investment is nontaxable to you. This favorable treatment of return on investment is exclusive to life insurance and offers a significant wealth buildup vehicle.

In a nutshell, here's what traditional whole life insurance have to offer:
o tax-favored cash values
o death benefits
o competitive interest rate
o guaranteed return

Next, an annuity is an investment contract between you and the insurance company. You receive a return on your investment that supplements your contribution. In the future, you can choose to "annuitize" the investment to provide income for a specified period of time in your lifetime.

The earnings on an annuity can grow without being lessened by taxes. These earnings are not taxable until you withdraw them, and then they are spread out over a number of years. When you begin receiving income from an annuity, only part of your income is taxable because you receive both interest and a partial return of the invested principal.

To make the best use of the positive tax advantages of an annuity, you also must be aware of the potential tax problems. The IRS imposes a penalty of 10 percent along with the tax owed on withdrawals unless you are over age 59 1/2 when withdrawing money from the annuity or cashing it in. These charges are in addition to any insurance company fees that might be imposed upon the withdrawal.
 
It is advisable to approach the purchase of an annuity with the expectation that you will not draw on it until you are older than age 59 1/2. To fully make the most of the tax advantages you

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