Easy College Planning for Normal People

If you’re a new parent, you know
that the first few years with a baby include constant concern for the countless
needs of your little bundle of joy, both now and over the course of their
lifetime. One of the most common concerns for parents is the cost of college
and how to handle unexpected expenses along the way. It is very easy to put off
planning for college funding and emergencies when you have so many others
things to navigate like childcare, breastfeeding versus formula, selecting a
pediatrician…the list goes on. Don’t let college planning be pushed off too far
into the future; you might just lose the biggest tool you have for college
planning for your child: compound interest. Not only can you plan for college
by starting early, but also with the right tools in place, you would be able to
offer your child money for college, money for a wedding or first home, as well
as a personal pension at retirement with over $1,000,000 lump sum to leverage
for drawing income. Oh, and did I mention this would all be done on a tax advantaged
basis? This strategy has been called Million Dollar Baby.

 The Million Dollar Baby principle uses life
insurance as the primary tool. If you haven’t learned about life insurance as a
savings tool, you can do a little reading on the topic here but,
in short, life
insurance allows you to grow after-tax money, on a tax-deferred basis, and can
be accessed tax-free through use of policy loans. Ownership in these plans have
the option to be passed over to your child after they turn 18. By the time your
child is out of college, the plan is fully funded and will continue to earn
interest for the rest of their lives.

Here is a basic example of how the
Million Dollar Baby principle can be executed. (It is important to note that this
is affected by current rates, and they can vary.) If you contribute $250/month to
the plan beginning before age one, you would pay in for approximately 20 years
and then stop. If we use 6.5% interest (which is the current dividend scale of
a large international insurance company), by the time your child is of college age,
there would be over $80,000 in available tax advantaged savings. At age 35, you
would have almost $200,000 available for a wedding, first home, or other
expense. At age 45, near the age when the average American would be tempted or
forced to draw from their 401k or IRA, you would have about $350,000 in
savings. By retirement at age 65, they would have over $1,000,000 in savings.
These funds can be drawn off of at any point during the life of the contract.
An additional advantage of these plans is that when you take a loan, you are
taking a loan from yourself and paying yourself the interest.

Life insurance has many uses for
all kinds of people, from the average, middle-class American to the wealthy
business owner. The Million Dollar Baby principle is one technique that
utilizes life insurance as the main vehicle to plan for your family’s financial
future. It is important to remember that life insurance can take many forms and
be applied to varying strategies for financial management. Always work with a
professional when navigating insurance choices.

            Million
Dollar Baby is a great way for us, as parents, to achieve the goal most all of
us have for raising our kids—to give them a better life than we had by
providing them what tools and advantages we can. This plan is definitely not
right for everyone and the numbers can vary, but the Million Dollar Baby
principle is a great demonstration of the power of life insurance when used
properly.

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