Portland State University's campus in 2012School is still decidedly out for summer. But parents and their seniors-to-be already are thinking about which college to attend and -- even more frightening --
.
So are insurance salespeople. And if you get a pitch for life insurance or an annuity as
or shield assets from financial-aid police, think twice. Or many times.
Insurance can work as a financial planning tool for parents of young children or for those who have built or suddenly inherited significant assets. But insurance and annuities make little sense for parents of high schoolers.
Yet it's widely sold as such. Consider the
. It certifies financial advisers so they put the designation CCPS (certified college planning specialist) next to their name. For $1,500, it also sells to advisers a "
," according to its website.
"If you sell life insurance ... this simple marketing and sales presentation system for college and permanent life insurance may be just what you're looking for to make your job easier,"
. "One advisor used a simple booklet in this program to get seven QUALIFIED life insurance appointments last month! Another advisor sold $25,000 in life insurance premiums in only one month using this program!"
Rick Darvis, an accountant and executive director of the NICCP, says he provides the program to get insurance sold the right way.
"There are so many of them who've used it the wrong way," Darvis said. "They're not advising on college. They're using it for a commission. That's given insurance a bad name."
, an accountant and personal finance specialist in Portland, recently dropped her NICCP certification because, she says, it was pushing products more than she was comfortable with.
"I feel their goal shifted over the years," said Yang, who specializes in developing college financing plans for parents. "That's the reason I left. It's against what I believe in."
Gary Carpenter was the NICCP's executive director from 2004 until 2007. Carpenter said he was fired because he pushed the NICCP to be a nonprofit organization focused less on selling products and services and more on training. Darvis said Carpenter was fired for incompetence.
Carpenter went on to start his own nonprofit trade association, the
. Its 150-plus members are mostly financial planners, accountants and college prep consultants focused on helping parents pay for college.
I attended the group's one-day conference on Monday in San Jose, Calif., at Carpenter's invitation. Refreshingly, none of the presentations mentioned selling financial products to parents.
Instead, they focused on changes in federal financial-aid programs, strategies for navigating financial-aid awards and speeches by college admissions officials about what they looking for in applicants.
"We've taken a different track," Carpenter said. "We started to educate, advise and train advisers, even those who don't have that much knowledge on the topic."
What do National College Advocacy Group members think about insurance?
Whole life insurance can be a viable planning option for parents with young children. They might need its death benefit if one of them dies.
A whole life policy builds up a cash value over time without exposing you to stock market risk. And you can borrow against the policy to pay for college. Generally, providers charge lower interest rates than either private student loans (7.9 to 12 percent) or federal PLUS loans for parents, which currently charge 7.9 percent rate.
But as the child and parents age, life insurance makes less sense.
"Unless Mom or Dad dies while they're in college, it's a moot point," said Dan Claffey, an investment adviser and owner of
, a college planning firm in San Ramon, Calif.
Though it's true insurance and annuities can be used to shield cash from the
, used nationwide to base financial-aid awards. FAFSA counts cash savings against you when you apply for financial aid.
But taking the insurance route doesn't help that much. It could also limit your finances in other ways. Why?
First, FAFSA gives parents an "asset protection allowance," Yang said. For couples whose oldest member is between 50 and 60, the allowance
between $46,000 and $61,000.
Beyond that, FAFSA considers only 5.6 percent of parents' assets as available to pay for college. And most families with less than $50,000 in adjusted gross income avoid having any assets assessed at all.
What's more, more than 300 mostly private schools require another financial-aid application called the
. Some of those high-priced colleges will specifically ask about parents' insurance and annuity holdings while determining their ability to pay.
Those schools cost a lot. You'll probably need the cash you tied up in the insurance contract to foot the bill.
And that's another disadvantage to the asset-shielding strategy. Buying insurance or an annuity ties up that cash. To get out of them, you have to pay surrender fees. In addition, the IRS penalizes an annuity's earnings by 10 percent if you withdraw it before age 59 1/2.
In addition, with today's low interest rates, annuities and insurance policies won't generate returns that keep pace with college inflation. The cost of tuition, fees, room and board at public four-year colleges has increased an average of 4.1 percent a year above inflation between 2001-02 and 2011-12,
.
Investing in a mix of stocks and bonds will likely give you a better chance of earning a return that keeps pace with college inflation. Is it riskier than insurance? Yes. But you probably can't get such returns without investing in stocks going forward.
Finally, an increasing number of college savings plans offer an investment option that's as safe as insurance, albeit lower-yielding.
The Oregon College Savings Plan's
provides a return of your original investment plus a guaranteed annual interest rate. That rate, adjusted each April 1, currently is 1.75 percent. The fund has generated a 2.33 percent return since March 2010.
That's not to mention Oregon's income-tax deduction for up to $4,345 a year in plan contributions for couples filing jointly ($2,170 for all others). The break provides a one-year, 9 percent return on your money.
"In the 14 years I've been doing this, I think I've seen one situation where using an annuity or life insurance is appropriate," Carpenter said.
There's a purpose for life insurance. There are reasons to buy annuities. Paying for college late in the game isn't one of them.
"There are very few people who actually benefit from that kind of asset repositioning," said Claffey, the owner of EdMD. "It's more of a selling point.
"For financial reasons it might make sense," Claffey added, "but not for financial aid reasons."
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