Today, we're going to be talking about college funding and more importantly, when a family needs or wants to use a modified endowment contract (MEC) for college planning and college funding.
So, the big picture is, we have a family. The family has done what they've done best for their kids, they've saved money to go to college. They maybe have $50,000, $100,000. Whatever the amount is, it's not enough money to get into the school of the child's choice. And what's really a shame is, even though the parents have done everything correctly, that little bit of money, which would be $50,000 or $100,000 – for most families, that's a lot of money, it'd be a lot of money for me – is keeping them from receiving financial aid. Because when they file their FAFSA, their EFC is too high.
So, the schools are going to say, "Well, you have all this money. We're not going to give you anything." Where the reality is they should be able to get some kind of financial aid, grants, or a scholarship, to pay the difference. A lot of times, families are disappointed. Now, they saved money for their kid, their kid got accepted at a top-tiered school, a private school, and you have to tell them, "Well, unfortunately, we can't afford it because we saved money for you." It's a heartbreaking story. I hear it more often than not, but there are solutions.
A common solution we have is, we put money into a modified endowment (MEC) contract. Now, the reason why we use that product is because of the guarantees.
If we look at this sample scenario, the client has put in $100,000. Because the way we structure it, we're at $99,000 Policy Year 1. No matter what happens, our cash values are very strong and we design it that way on purpose, so you can have access to your cash value. By Policy Year 2, you're above the basis. So that $100,000 deposit is above $100,000, and it's pure growth.
Now, what's unique about that is if you were to use any other investment option, that $100,000 would probably be around $60,000 or $70,000, and then build its way up over time. But we design it so that way, we take away all the costs, all the fees, everything. So that way, it's pure growth moving forward.
The drawback is, remember, you do have to pay taxes and penalties, everything above basis.
Short-Term Play for Guaranteed Growth
But for a short-term college solution, it's a great scenario because this family now, in Policy Year 1, they're eligible for financial aid and grants and scholarships so if they were to receive, let's say, $20,000, $30,000 in aid, and let's say the total tuition was $40,000, they would only have to borrow $10,000 out of that policy to pay the difference. That's a really good scenario!
That's the family that, previously, were discouraged when their kid got accepted to a top-tiered school. They were excited, but then, all instantly, that excitement turns into disappointment because they couldn't afford it. Now, they can. Again, this is a short-term solution to help that kind of family.
Types of Guarantees
Now, let's talk about the guarantees in a whole life (WL) contract. The reason why you buy a whole life contract, or as I call it, a "bond alternative," is because of the guarantees.
When someone goes to a bank and purchases a bond, they don't buy it for the long-term growth or the hypothetical of what they could do. They do it because they know the rates and return are guaranteed, it's for short-term money. But more importantly, they know after a certain time period, that money will be liquid and it's theirs.
It's the same thing with a whole life contract, we base it on the guarantees, not the non-guarantees and let's review why.