Funding college without wrecking retirement: How one advisor helps clients pass this scariest of tests
It’s no surprise that many parents are unprepared financially to help their children pay the ever-escalating cost of attending college.
The College Board reports that a "moderate" college budget for an in-state public college for the 2014–2015 academic year averaged $23,410. A moderate budget at a private college averaged $46,272. Tuition and fees are increasing at a rate of about 3% per year, according to the College Board Annual Survey of Colleges.
Figuring out how to pay for college is a daunting task that freaks out plenty of parents, to be sure. That being the case, there’s a big opportunity for insurance and financial advisors who can help those parents figure out how to fund their children’s college education without wrecking their own retirement.
“The major reason it should be on the radar for advisors is because people are sorely ill-prepared for the cost of college today,” says Kerry Wallingford, CLU, ChFC, CCA, RICP, president at Wallingford Financial & College Planning in Seattle.“If they do not have responsible advisors, that are helping them make sure they can afford college – but more importantly they are on track for retirement – then we’re going to find a lot of people who are falling into retirement completely broke.”
Wallingford, a producing general agent who has been with Ohio National since 2009 and specializes in college planning, says the subject is an opportunity for advisors to make sure they are looking out for their clients’ best interests.
“When I talk to families, nine times out of 10 the clients have no idea how expensive college really is, and they secondarily have no idea how prepared or how ill-prepared they are for retirement,” Wallingford says.
She says it’s a very natural conversation to have when you’re asking a family, ‘Do you know if your retirement plan can sustain your college tuition payments?’ “Invariably, they don’t,” Wallingford says. “I think that without proper retirement planning, people shouldn’t be talking about college. For an advisor, college planning should be part of the conversation as much as ‘do you have a will?’ is part of the conversation.”
If the client has children, chances are they’re going to need help figuring out how to pay for their college. If they don’t plan the right way, they could well end up destitute for retirement. Still, Wallingford finds it’s a conversation parents aren’t anxious to have with either their advisor or their kids.
“Parents still don’t like to talk about it. Talking about money almost seems like voodoo. We have to break that cycle,” Wallingford says. “As advisors we need to begin the conversations with parents at a very early age to help them understand what it’s going to take to get ready for college and get ready for retirement. Those are integrated conversations; not mutually exclusive conversations. They have to be talked about in conjunction.”
Where to start
Fact-finding and then educating the client is how Wallingford typically begins the whole process.
“We’ve got to walk through slowly what they’re doing with their money and where it is first. Often times I find clients who are max-funding their 401(k), putting money into a Roth,while building no capital that is liquid or even potentially available to help with college. So the first place I have to start is by educating the client on the advantages and disadvantages what they’re doing with their money,” Wallingford says.
Then she goes through the process of educating the client on what whole life insurance is and what it does. Here’s one example of an educational technique she uses:
If I said to you, “you can choose to pay $200 for $1 million of life insurance or $20,000, what would you pay?” Of course they say $200. My next question is if I can design investment utopia, let’s talk about what we want our investment to do:
• First of all, we want it to have tax-deferred growth;
• Secondly, we would want it to have tax-free withdrawals (Whole life policies may be subject to taxation);
• We want it to have a competitive long-term rate of return;
• We want to be able to contribute as much to the investment as possible, so no limits to what we can put in (except MEC limits);
• We want to be able to know that it’s safe and it’s got a no-loss provision (WL can “lose” money if surrendered);
• That it can be used as collateral;
• That we’re guaranteed to be able to borrow against it;
• That it’s protected from creditors or from lawsuits (depending on the state);
• It’s still going to be an investment if I get disabled or I die – it’s going to be there (with an optional rider, conditions apply);
• And it’s tax deductible.
“If we have all of those opportunities in one investment, Mr. Client, how much of your $20,000 would you put there?”
Typical clients will then look at me, and say, ‘Can I put more than twenty in?’ And I look at them and say, ‘Yes, as a matter of fact you could, but there’s one thing you can’t have out of all 11 of these, would you be willing to give up tax deductibility? They say yes, and I say, ‘Well guess what? Let me introduce you to permanent life insurance.’ And their response is, ‘Huh? How come I have never heard of this before?’”
The ability to explain what it does and have the client say they want to put as much in there as they can is a field underwriter’s dream, Wallingford says.
“It’s a matter of educating the client in how life insurance works, first. And once you do that it’s a very rare situation where someone says, ‘Well, I really don’t want to do that,’” Wallingford says. “If they say that, I go back and say, ‘OK, you tell me which of these features about permanent life insurance you don’t like.’”
Wallingford says clients don’t typically come in knowing much about how cash value life insurance works, which is why it is so important to help them understand.
“You have to make sure that if you’re going to teach your clients about whole life insurance and how it works, that you have materials that they can read to follow up that informs them and teaches them. And there’s some great bookswritten by people in our industry that help clients see how life insurance can really work,” Wallingford says.
Next page: 529 vs. Whole Life
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