Owning life insurance and annuities: A smart decision for parents?

Have you ever been advised to shift some (or all) of your child’s college savings into a life insurance policy or annuity? At first glance, the idea seems like a no-brainer, because those accounts don’t need to be reported as assets on the Free Application for Federal Student Aid (FAFSA). But the reality is a little more complicated.

The annuity reality

Your Expected Family Contribution (EFC) is an index of your family’s taxed and untaxed income, assets, and benefits (such as unemployment or Social Security) the government uses to determine your child’s eligibility for federal student financial aid.

If you put part of their education savings in an annuity, then end up needing to withdraw the money to pay for their college later, it will show up the next year as a distribution – affecting your reportable assets on the FAFSA and potentially increasing your EFC.

Something else to keep in mind: Nearly 250 colleges, universities, and scholarship programs in the US use the College Scholarship Service (CSS) Profile, an online financial aid application from College Board, to determine how much nonfederal or institutional aid a student is eligible for. The CSS Profile counts non-qualified annuities as assets. So, if your child chooses one of those schools, you’ll have to report them.

What about life insurance?

The FAFSA and the CSS Profile both exclude life insurance policies from student financial aid asset calculations across the board. But beware of the additional premiums, early withdrawal, and surrender penalties that may make your money less liquid than you need it to be.

The takeaway

It’s often not advisable to ‘stash’ money from your child’s savings account when:

·        You have limited other sources to pay for your family’s portion of college costs

·        There are other ways to reduce your EFC

·        Your child chooses a school/program that requires the CSS Profile form in addition to the FAFSA

·        You aren’t sure what form of aid if any, your student will receive

Yes, life insurance and annuities are an important part of any balanced savings plan. But the decision to move any of your child’s education savings into these vehicles is a nuanced one. Call Freedom Wealth Services at 904.373.8349 or visit our website today to schedule a free consultation – let us help you develop college financial solutions that are just right for your family.

Published 11.22.2021


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