Money Smart Athlete Blog

Planning for your children’s education – Life insurance policies, college funds and more!

Every parent wants to provide the best to their children and probably the biggest and most expensive challenge will be sending them to university. University education is critical as it may be the key for your children getting a better job with a higher earning capacity, in the future.

University tuition and fees are climbing really fast, with the average yearly cost averaging between $24,610 for public and $49,320 for private colleges in the US (2016-2017 academic year). If you reside in the US you always have the option to send your children to study abroad. In Europe, tuition fees are generally much lower compared to the US, averaging at €4,500 a year for European students and €8.600 a year for non-Europeans, but the majority of the programs are taught in the local language, therefore knowledge of the particular country’s language is essential.

As an athlete, you might be already retired from sports, when it’s time for your children to go to college. This special characteristic of professional athletes, where they receive high income for a shorter period of time than the average person, combined with the current low-interest environment, makes it imminent to start saving earlier and saving more, to be able to provide for your children’s education.

Because of the great difference in costs associated with higher education between the US and Europe, there is a greater variety of options in the US to start saving for your children’s education. However, there are a few options which are universal and these are:

  • Life insurance policy can be used to fund university education and as a guarantee that, in the event of a premature death of either you or your spouse, your child will have access to sufficient funds to finance a university education. Cash value life insurance, especially, is ideal for this purpose. It’s designed as a permanent form of life insurance that includes a death benefit component and a savings (cash value) component, which earns a rate of interest and normally accumulates tax free. The child can utilize the insurance proceeds upon the commencement of the studies or if you choose, you can take out a loan up to the amount of accumulated savings from the insurance at a low rate of interest.
  • A Custodial account is a savings account in your child’s name that you (or any other person set as the custodian) control until your child becomes an adult. You can set up an account easily at any bank and you can deposit or withdraw money without any restriction for your child’s benefit. The downside is that you can’t switch beneficiaries on the account: once they are set, your child will have complete control over the money as an adult, even if he or she decides not to study. Another drawback of custodial accounts is that they are taxed at normal rates.

As stated before, in the United States there are far more options to fund the education of your children than anywhere else in the world. We set below two options specifically offered in the US.

  • Offered by every state in the US, 529 plans are portfolios of mutual funds with tax advantages when saving and paying for higher education. There are two major types, prepaid tuition plans and savings plans. Prepaid tuition plans allow the plan holder to pay for the beneficiary’s tuition and fees at designated institutions in advance. Savings plans are tax-advantaged investment vehicles, similar to IRAs. The 529 plan can cover tuition to overseas universities as long as they are included in the Education Department’s list of eligible schools.
  • Coverdell accounts were created by the US government to help families save money to pay for qualified education expenses. They can be opened for anyone under the age of 18 but assets must be withdrawn before the recipient reaches the age of 30. Contributions to these accounts are limited to $2,000 a year and are not tax deductible, but grow tax free until withdrawn. When the contributions are withdrawn, they are tax-free assuming that they are less than the account holder’s annual adjusted qualified education expenses. If they are higher, the gains are taxed. There are also restrictions to Coverdell accounts that make them a not so attractive option for athletes. Contributions are limited to $2,000 a year and parents who earn more than $110,000 a year ($220,000 if filing a joint return) are not eligible.

Whatever method you choose to help finance your children’s future studies, always remember that you should start saving early, preferably when your child is born. Any amount of money you manage to save, you won’t have to borrow later. And always have in the back of your mind that your professional sports career is not guaranteed by anyone, and you should strive to guarantee a better future for your children through providing them access to higher education.