The Start Smart College Plan
Answers to frequently asked questions
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The costs of a college education and the options for paying for it vary according to such factors as kind of school and its geographic location, a student's alternatives for housing and food, and whether a student is full-time or part-time. "Trends in College Pricing," published annually by The College Board, offers helpful insights. Here is an overview of some findings reported in the 2008 edition, covering the 2008-2009 academic year:
Type of School 2008-09 annual
college expensesCollege cost increase annually Public 2-year Commuter College: $2,400 increase annually by 4.7% Public 4-year In-State On-Campus: $14,300 increase annually by 5.7% Public 4-year Out-of-State On-Campus: $25,200 increase annually by 5.2% Private 4-year On-Campus: $34,100 increase annually by 5.6% Estimates of college costs in the future: Using data from the College Board and its website (www.collegeboard.com), and assuming that college expenses increase by 5% annually, the anticipated cost of attending an in-state public college or university for four years beginning in 2026 is $148,000. For private institutions, the anticipated cost is around $353,000.
Don't be overwhelmed by these numbers. Resources such as scholarships, loans, grants and other forms of financial aid help to reduce these amounts, but rarely cover the full cost of attending college. That's why you should start saving now with the Start Smart College Plan.
Increase in college education costs compared to inflation
For many years, the cost of attending college increased more rapidly than the Consumer Price Index (CPI). During the past decade, the average cost of tuition and fees increased 2.4% over the rate of inflation at private 4-year colleges and 4.2% at public 4-year colleges. Between July 2007 and July 2008, the CPI increased 5.6% – the first period in a long time where the average increase in total charges for attending a college or university came close to the CPI:
Key considerations
- College is expensive regardless of whether attending a public or private college.
- Costs can vary widely depending on whether the college or university is public or private, a research center or not, or a 2-year or 4-year school.
Saving for college
The sooner you start to save, the easier it is. Generally, the more time you have for reaching your savings goal, the smaller the amount of money you need to set aside each week, month or year. Waiting even one year can significantly increase the amount you need to save.
Saving for all or some of the costs
Some families have the resources to pay for their child's entire education, producing a great sense of accomplishment and pride. Not every family, however, is able to do so. Therefore, saving for even part of a child's education can help a great deal and mean a lot to your child. Financial aid rarely provides 100% of what is needed.
Mix-and-match ways to save and pay
Many people pay for college through a combination of savings, financial aid, and loans taken by the student or the parents. Depending on the kind of loan, interest may start accruing after graduation or immediately. Also, some students get help from grandparents who might gift money to them or set some money aside in a financial account.
Financial Aid
Most financial aid is based on family income and the assets available to pay for education. The amount of assistance for which a family may qualify is based on evaluation of a Federal financial aid form that must be completed and submitted.
Estimated average of 2008-2009 grant aid from all sources and from Federal tax benefits:
Type of School 2008-09 Grant Aid Full-time students at private 4-year institutions: $10,200 est. average Full-time students at public 4-year colleges/universities: $2,700 est. average Full-time students at public 2-year colleges: $2,300 est. average The above estimates assume that all aid was applied to tuition and fees, although some may have been for room and board.
Average grant aid per student and average net college costs conceal significant differences among students. For example, increases in Federal aid for lower-income students have a greater impact on college access and affordability than for higher-income students.
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The cost of paying for a college education can seem overwhelming. Instead of focusing on the expense, it can be helpful to think of college as an investment in the future. Among the benefits of a college education:
Increased earnings throughout life, demonstrated by the 2007 median family income by households having the following education characteristics, as reported by the Bureau of Labor Statistics:
Level of Education: 2007 Median Income Less than High School Diploma: $29,760 High School Diploma: $49,739 Some College: $60,955 Associate Degree: $69,600 Bachelors Degree or higher: $100,000 - Better job opportunities. Having a Bachelor degree or higher degree opens up many more job opportunities and can lay the foundation for entering a variety of careers and professions.
Less likely to be unemployed. Also according to the Bureau of Labor Statistics, unemployment rates are significantly higher among less educated individuals than among those with more education. The following is a breakdown of March 2009 unemployment rates by level of education for people aged 25 and over (not seasonally adjusted):
Level of Education 2009 Employment Rates Less than High School Diploma 15.5% High School Diploma: 10.0% Some College: 7.8% Bachelor Degree or higher: 4.3%
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Various kinds of financial aid may be available to assist with part of the cost of college. Among them, according to the 2008 "Field Guide to Financial Planning," published by The National Underwriter Company:
- Federal Work-Study Program — Provides jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The amount of award depends on the student's level of need and the funding level of each participating school.
- Federal Pell Grants — The maximum Pell Grant for the 2008-2009 award year was $4,731. A Pell Grant does not have to be repaid. The amount of the award is calculated by the Federal Department of Education based on the student's needs assessment score and whether the student attends on a full-time or part-time basis.
- Academic Competitiveness Grant Program — Two new programs supplement the Pell Grants for 2006-2010. The grants range from $750 to $1,300 for first- and second-year undergraduate students.
- Federal Supplemental Education Opportunity Grant — Grants range from $100 to $4,000 per year and depend on the student's need, the funding level of the school, and the policies of the school's financial aid office.
Stafford Loans — Federal loans, a major source of funding, are commonly referred to as FFEL or FFELP loans, adminstered by the Federal Family Education Loan Program. Private banks and other lenders provide the loans, which have yearly maximums. There are two kinds of loans:
- Subsidized loans, awarded based on need. No interest is charged until the repayment period starts.
- Unsubsidized loans, awarded not based on need. Interest is charged from the time the loan is disbursed until it is paid in full.
- Perkins Loans — Low-interest loans provided to students with demonstrated financial need while undertaking undergraduate or graduate studies. Each school determines eligibility, and repayment is made to the school. The maximum annual loan is $4,000, with an overall $20,000 maximum for undergraduate studies. Interest is a low 5%.
- Parent Loans (PLUS) — Loans to parents with dependent undergraduate students enrolled at least half-time. Parents must submit to a credit check. The amount of the loan can equal the student's cost of attendance minus any other financial aid provided.
- Public Service Loan Forgiveness — Available to borrowers of Federal Direct Stafford Loans, Federal Direct PLUS Loans, and Federal Direct Consolidation Loans. After 10 years of full-time employment in public service, the program discharges any remaining debt.
- Income-Based Repayment — Program starts July 1, 2009 and allows borrowers of FFEL or Direct Loan programs to cap repayment amounts at 15% of discretionary income. This will extend the term of the loan, which is generally 10 years.
Qualifying for Financial Aid
To apply for financial aid, a free Application for Federal Student Aid form must be completed and submitted. A formula created by the Federal Government helps determine who qualifies. The formula subtracts the Expected Family Contribution (EFC) from the cost of attendance, taking into account the assets and income of the parents and child. The EFC is the amount of money a family is expected to contribute and includes both the parental and student contribution. Several factors are taken into consideration in calculating the EFC, including the student's dependency status, family size, number of family members in school, and taxable and nontaxable income and assets.
Some helpful website links
Free Application for Federal Student Aid: http://www.fafsa.ed.gov/before003a.htm
Financial Aid Formula: http://www.fafsa.ed.gov
Federal student financial aid program: http://studentaid.ed.gov
Public Service Loan Forgiveness: http://finaid.org/loans/publicservice.phtml
Expected Family Contribution: http://ifap.ed.gov/ifap/index.jsp?
The College Board: http://www.collegeboard.com
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The key advantages of an endowment over other savings strategies are that it provides:
- A guaranteed sum of money, with no dependency on fluctuating interest rates or investment performance.
- Life insurance protection.
- The flexibility to use the money for any purpose, not just education expenses.
The chart below provides a comparison of an endowment policy to other kinds of saving strategies for college.
Endowment Policy Savings Account 529 Plan Mutual Fund Savings Bond Pre-paid Tuition Plan Offered by: Insurance company Bank Various financial institutions in partnership with a State sponsor Various financial institutions U.S. Government States, Colleges/Universities What makes your money grow? Guaranteed annual increases ensure your chosen face amount is reached by maturity Fluctuating interest rate (currently 0.5% or less based on account balance) Rate of return for the investments you chose Rate of return for the investments you chose Interest rate set every six months; maturity guaranteed in year 20 Rate of return for the investments you chose Risk: None Interest rate fluctuation means you may not reach desired goal Investment and market risk — could lose money or gain more slowly than expected Investment and market risk — could lose money or gain more slowly than expected None Investment and market risk — could lose money or gain more slowly than expected Are earnings taxable? Yes Yes No Federal tax as long as the money is used to pay for educational expenses; State income tax deduction depends on the plan you choose Yes No State or local taxes, but subject to Federal income taxes (except in certain situations) No, as long as the money is used to pay for educational expenses Are contributions tax deductible? No No Maybe. Some States provide a State tax deduction No No No How can money be used? For any purpose For any purpose Only for education, or must pay taxes on the account's growth For any purpose For any purpose Only in sponsoring State or college (or money will be refunded) How much money must be or can be contributed? Policy owner pays premium set by insurance company annually, monthly, quarterly or semi-annually Consumer decides how much to put in and how often to contribute May require initial minimum investment; total contributions generally limited to amount needed to pay 5 years of tuition Consumer decides how much to put in and how often to contribute; may have account minimums Available in amounts from $50 to $10,000, sold at half the face amount (e.g., $1,000 costs $500); can only purchase up to $5,000 in any one year Generally limited to amount needed to pay 5 years of tuition Pays a Death benefit? Yes No No No No No Guarantees growth? Yes No No No Yes No Additional information: Provides a guaranteed sum of money with the added protection of life insurance Highly liquid, good to use for an emergency fund More than 100 plans to choose from. Sales charges and account fees apply and vary by plan; some plans have substantially higher fees than others Thousands to choose from. Sales charges and account fees vary Bonds must be held at least one year before they can be liquidated for their current value, not full face amount Generally provides a tuition discount at the school attending. No guarantee the child will be accepted; regular admissions requirements apply
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There are several advantages to the Gerber Life Start Smart College Plan:
1. Guarantees:
- The face amount is guaranteed and will be paid in full upon maturity as long as premiums are paid. There is no investment or interest rate risk for the policy owner.
- Premiums are guaranteed never to increase throughout the entire life of the policy.
- The death benefit is guaranteed to equal the face amount of the policy and will be paid to the designated beneficiary if the insured dies before the maturity date.
2. Flexibility:
You have choices for the maturity period and face amount: You can select the length of the policy's maturity, from 10 to 20 years. You also can select the face amount, from $10,000 to $150,000. The shorter the maturity, the higher the premium for the same face amount. This wide range of choices allows you to select the face amount and maturity period that best fit your family's budget and needs. Remember, saving something for your child's education, even if it is not the entire amount, is better than doing nothing.
NOTE: Consider buying four different policies, one for each year of college, to spread some of the cost throughout those years.
- You can use the money for more than just college expenses. At maturity, the money may be used for any purpose the policy owner desires. There are no restrictions such as those found in 529 Plans or Coverdell Accounts.
- You have access to cash: The policy's cash value can be accessed as a policy loan.
3. Confidence: Gerber Life is a name you know and trust.
- For more than 40 years, Gerber Life has been providing reliable life insurance to millions of families, helping parents provide better opportunities and a more financially secure future for their children.
- In May 2009, for the tenth consecutive year, Gerber Life was rated "A" by A.M. Best, an impartial reporting agency that rates insurance companies on financial stability, management skill and integrity.
- Gerber Life is part of the same Gerber products company you've probably known since you were a baby. We're proud to share in this 80-year tradition of quality and trust.
- Gerber Life is a wholly owned subsidiary of Nestlé, an international nutrition company that for more than 140 years has been committed to helping parents take care of their families.
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Actually you may want both. The Grow-Up Plan and Start Smart each provide different benefits. Depending on your goal you may choose Grow-Up or Start Smart, or both.
If your goal is primarily to provide life insurance protection for your child, then the Grow-Up Plan will work for you. The Grow-Up Plan provides lasting financial protection in the form of a guaranteed death benefit and an accessible cash value that builds over time. Compared with the Start Smart Plan, Grow-Up has a lower premium and offers more life insurance but has a smaller cash value.
If your goal is primarily to save for your child's college education, then the Start Smart College Plan is for you. It is an endowment insurance policy that provides a guaranteed amount of money after a certain number of years. Compared with Grow-Up, Start Smart has a higher premium but provides substantially larger cash value, which accumulates much more quickly than with Grow-Up. Additionally, the policy provides adult life insurance protection. If you were to die, your child as beneficiary would still receive the amount you intended for his or her college education.
Current Grow-Up® Plan —
Whole Life InsuranceStart Smart College Plan —
EndowmentGoal Protection Accumulation Available Face Amounts $10,000 — $50,000 $10,000 — $150,000 Insured Child Parent or Grandparent Beneficiary Parent or Grandparent Child at Maturity Cash Value (in 18 yrs) Increases slowly.
For $15K Policy = approx. $4KIncreases rapidly.
For $10K Policy = $10KTaxable Income None Yes Return of Premium 21 years Maturity-Midpoint Benefits of the Grow-Up Plan:
- For many families, Gerber Life's Grow-Up Plan offers a wonderful way to start their children on the path toward financial independence. Because the policy is bought when your child is very young, the premiums are typically very inexpensive and don't increase throughout the duration of the policy. In addition, the policy's life insurance doubles when the insured child reaches age 18, without any increase in premium. For example, a $25,000 Grow-Up Plan doubles to $50,000 at age 18.
- The Grow-Up Plan will help prepare your child to take care of his or her own family someday. It's a good way to pass on your family values of financial responsibility and a commitment to creating a better future for your children.
Benefits of the Start Smart College Plan:
- You select the amount of money you want and decide when you want it. Gerber Life will tell you how much you need to contribute to the policy each year to reach your goal. For example, if you want to have $25,000 in 18 years, you would need to contribute $83.33 per month to the Start Smart College Plan. (This example assumes the insured is a female in good health between the ages of 18 and 25.)
- In addition, the endowment provides life insurance. If the insured person were to die before maturity, the policy would immediately mature and pay its full face amount to the beneficiary. For example, if Jane Doe were to buy a $25,000 Start Smart College Plan that matures in 18 years when she was 25 years old, her monthly premium would be $83.33. If she were to die after 10 years, Gerber Life would immediately pay the full amount of the policy to her beneficiary.
The Grow-Up and Start Smart plans have different tax treatments:
- The cash value growth in the Grow-Up Plan will not generate any taxable income.
- The cash value growth in the Start Smart College Plan will generate taxable income after a few years.
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The Gerber Life Start Smart College Plan is an endowment life insurance policy. It is designed to help parents save a guaranteed amount of money for their children's college education expenses in a safe and secure way.
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Unlike traditional life insurance, which only pays a benefit upon the death of the insured person, an endowment policy pays a benefit after a specified number of years. With Gerber Life's endowment policy, you can select a benefit amount from $10,000 to $150,000 and a maturity period from 10 to 20 years. You then pay an annual premium that is guaranteed never to increase.
When the policy reaches maturity, Gerber Life will pay the full benefit amount (called the "face amount") as a lump sum to the policy owner. If the insured person dies before the policy reaches maturity, Gerber Life will pay the full face amount to the designated beneficiary.
Both the face amount and the death benefit amount are guaranteed. This means that as long as all the premiums are paid in full, the policy owner or beneficiary is guaranteed to receive the full benefit amount of the policy (less any outstanding loans and loan interest) at maturity. Gerber Life assumes all of the investment and interest rate risk. There is no risk to the policy owner.
Since an endowment policy is considered life insurance, the person to be insured must submit an application which asks some health questions.
Start Smart is a guaranteed way to reach your savings goal.
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Endowments have been around for many years. They were originally used to supplement retirement income but are now also used to help people save for future education costs. Endowment policies are very popular in other countries because of the safety and guarantees they provide.
You may want to consider an endowment policy as part of your overall savings strategy for your child's college education because it provides a guaranteed amount of money, regardless of the changing economic environment, interest rates or investment returns.
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No. The money received from the policy can be used for any purpose the policy owner desires.
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The internal rate of return varies with the age of the insured and the length of time until the policy matures. For example, if a 25-year-old female purchased a $25,000 Start Smart College Plan that matures in 18 years, the internal rate of return would be approximately 3.4%.
The Start Smart College Plan focuses on safety and security, making certain that the amount you select to receive at maturity is paid as promised. Consequently, it is a conservative product. It is not intended for people seeking higher rates of return and willing to take more risk.
With the Start Smart College Plan you transfer all the investment risk and interest rate risk to Gerber Life. You won't have to worry about interest rates falling or stock market fluctuations. And you have the added benefit of life insurance protection—so you know your child is guaranteed to receive the entire benefit amount even if something happens to you.
Guaranteed growth regardless of interest
rate or stock market fluctuations.**Chart is only an example and is not intended to reflect the actual growth of any one policy.
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Yes. As the cash value in your Start Smart College Plan increases, it will generate taxable income. After your application has been approved, we will send you a notice containing important income tax information. The notice will provide a more detailed explanation of your policy including the expected taxable income along with cash value and other benefits for each policy year. In addition, Gerber Life will send IRS Form 1099-R to you, the policy owner, for each year that there is taxable income – just like a bank or mutual fund company would do if you saved or invested with them.
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An individual endowment's cash value grows much quicker than a life insurance policy. Because of the rapid growth of cash value, an individual endowment will generate taxable income when the cash value exceeds certain limits imposed by the Internal Revenue Service. Because of this, the IRS considers the individual endowment an investment and taxes it like other investments, even though the policy is still considered a life insurance policy.
The amount of taxable income is calculated using a method described in the Internal Revenue Code. If a death benefit is paid, the amount paid as a death benefit (Endowment Amount less Cash Value) will generally be income tax free.
Taxable income usually doesn't start until several years after the policy has been in force. In the first year that there is taxable income, the amount will be slightly larger than in subsequent years. This is because the Internal Revenue Code requires insurance companies to use methods that combine several years of cash value growth.
It is the responsibility of Gerber Life to tell you when there will be taxable income, to calculate the amount of your taxable income, and to provide the information to you on an IRS Form 1099-R. The income reported on your 1099-R should be added to your other income and reported on your tax return. The IRS also requires that we send them a copy of your 1099-R.
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The IRS requires the life insurer issuing the policy to withhold 10% of the taxable income if it exceeds $200 in any year, unless you elect not to have Gerber Life do the withholding. Generally, paying the tax yourself will be a better option for the following reasons:
- The only way for Gerber Life to withhold money for taxes is to take a loan from your policy. When we take a loan, we are required to charge 8% interest. Therefore, we strongly recommended that the policy owner "elect out." This means that the policy owner will be required to pay any taxes due, just as with all other sources of income.
- By "electing out," the policy owner will not have loans and loan interest reducing the maturity payout. If Gerber Life takes policy loans to pay the tax for you, the amount paid from the endowment at maturity will be less than the face amount, unless the loan and interest are repaid prior to maturity. (Endowment Amount less Total Outstanding Loan and Loan Interest = Final Payout)
- Before we can put your endowment into effect, we must receive your first premium payment AND a signed Federal Income Tax Withholding Election Form. This is the form you would need to use to either "elect out" or agree to having Gerber Life withhold 10% of the taxable income for you. In either case, you may be responsible for paying estimated taxes. Therefore, we suggest you consult with a tax adviser to determine if you need to file estimated taxes.
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Internal Revenue Code Section 1035 Tax Free Exchange generally allows a taxpayer to transfer cash value from one life insurance policy to another, or from a life insurance policy to an endowment or an annuity, without paying any income tax on the cash value. Tax on the cash value would be due only if the total cash value exceeded the amount of premium that was paid into the policy. Any loans would be added back into the total cash value.
Because Gerber Life's Start Smart College Plan is a fixed-premium product, a transfer of cash value from one policy to another is not generally possible. Therefore, the transaction will not qualify for tax-free 1035 treatment. Any cash value in excess of the first year's premium would be put into a pre-paid premium account. Because the excess cash value is paid into the account and not moved entirely into the endowment policy, it would not qualify under IRC Section 1035.
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Under Section 7702 of the Internal Revenue Code, in order for a policy to qualify as life insurance it must satisfy the guideline premium limits of Section 7702(c) and the cash value corridor limits under Section 7702(d). As the cash value gets closer to the full endowment at maturity, i.e. cash value will equal the face amount of the policy, it will fail either the Guideline Premium Limits test or the Cash Value Corridor Limits test.
The year of failure will generally occur early in the life of the policy. Once the policy fails either test, Gerber Life is required to calculate the amount of taxable income that is generated each year.
IRC Section 7702(g)(1) provides that, starting with the first calendar year of failure, the owner of a "failed" policy is currently taxable each year on the policy's "inside build up," grossed up as if an annual cost of insurance (COI) charge were about to be taken out of its cash value.
More specifically, IRC Section 2203(g)(1) calculates an includable amount of "income on the contract" for each taxable year as the excess of (A) the sum of the increase in the policy's net surrender value (ignoring loans) during the calendar year plus the COI for such year over (B) the Premiums Paid for such calendar year.
For the calendar year of failure, the Section 7702(g) Income under IRC Section 7702(g)(1)(C) includes the aggregate amount of all of the policy Section 7702(g) income amounts for all prior calendar years and no such prior annual Section 7702(g) income amount can be negative.
Under IRC Section 7702(g)(1)(D), the COI amount is the mortality charge "stated" in the policy. If no "actual" COI charge is "stated" in the policy, the IRS is likely to use the policy's guaranteed mortality rates (e.g. 2001 CSO rates) to determine such COI amount for each year.
If Underwriting approves an application for the endowment, the policy owner is provided with a Tax Disclosure and Withholding Election Notice. The notice provides an example of what the taxable income would likely be, given the policy owner's age, underwriting class, maturity amount and gender, assuming that the premiums were paid annually and at the beginning of each year. Of course, the actual amount of tax for any given calendar year will vary depending on the effective date of the policy, the timing of the premium payments and the cash value growth of the policy. Gerber Life will provide a Form 1099-R to the policy owner and the IRS for each year that there is taxable income.
When the policy fails IRC Section 7702 testing, another copy of the notice and election form will be sent to the policy owner. A shorter form of the notice will be sent each year that the policy is in effect. Each year, the policy owner has the option of changing his or her election by writing to Gerber Life.
Tax Withholding Requirements
IRS Rev. Ruling 91-17, 1991-1 C. B. 190 takes the position that the insurer is subject to tax reporting and withholding obligations with respect to a life policy that "fails" its IRC Section 7702 limits, and indicates that the insurer needs to get an "election out" form from the owner to avoid tax withholding on such a policy's Section 7702 income.
The policy owner has two choices for meeting tax withholding requirements. The policy owner can either:
- Have Gerber Life withhold 10% of the taxable income on his or her behalf, or
- Elect out of having Gerber Life withhold 10% of the taxable income and instead pay the tax as he or she normally would.
If the policy owner decides to have Gerber Life withhold 10% of the taxable income, it will be done in the form of a policy loan. Withholding is generally 10% of the taxable income in any year during which there is $200 or more of taxable income. Because the endowment policy does not allow for partial surrenders of cash value, the only way to withhold 10% of the taxable income is by taking a policy loan secured by the policy's cash value. The policy loan will be charged interest at a rate of 8%. If there is an outstanding loan balance at maturity, the final maturity value will be reduced by the amount of the loan.
If the policy owner elects out of having Gerber Life withhold 10% of the taxable income, the policy owner will need to pay the appropriate amount of tax at the time he or she normally files his or her tax return. However, the policy owner should determine if the amount of taxable income generated by the policy is large enough to require that estimated taxable income taxes be filed. Gerber Life is not in a position to advise whether the policy owner should pay estimated taxes.
In order to buy the policy, the prospective policy owner must consent to having Gerber Life automatically take a loan against the policy if, at any time, the owner wants Gerber Life to withhold taxes. A policy loan to pay taxes will only be put into effect by Gerber Life if the policy owner elects to have Gerber Life perform withholding on his or her behalf.
Modified Endowment Contract
Under IRC Section 7702A, a policy that "fails" the Guideline Premium Limits or Guideline Premium/Corridor Limits test will be considered a Modified Endowment Contract (MEC). If the policy is a modified endowment contract, certain policy transactions may result in the policy owner having to recognize taxable income if and when the policy is in a gain position, i.e. cash value exceeds premiums paid. However, once the policy fails under IRC Section 7702, it is no longer considered a life insurance policy for IRS purposes. Consequently, the rules under IRC Section 7702A no longer apply. It is Gerber Life's belief that although the policy will be considered a MEC very early on, the policy will not be in a "gain" position and will not result in any taxable income until after it fails under IRC Section 7702.
Death Benefit
If the owner dies before the policy matures but after it no longer complies with IRC Section 7702, the excess of its death benefit amount at the time of death over its net surrender value is generally exempt under IRC Section 7702(g)(2) and Section 101. However, the policy's Section 7702(g) income for the owner's year of death is likely to be taxable to the owner's estate or beneficiaries under IRC Section 691 (to the extent not taxable to the owner).
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You should choose a maturity amount that best fits your savings goal and your budget. Many parents aspire to pay for their child's entire college education, but for some parents this goal can be difficult to reach. It's important to remember that saving something, even if it's not enough to cover all the expenses, is better than not saving anything. Here are some points to consider:
1. The first step toward reaching a savings goal is to understand what it costs to send a child to college. This includes learning about the differences in cost between public and private colleges, and how much those costs will increase over time.
Average estimated undergraduate costs for the 2008-2009 academic year including tuition, fees, room, board, books, supplies, transportation and other expenses, according to The College Board's "Trends in College Pricing 2008":
Type of School 2008-09 annual
college expensesCollege cost increase annually Public 2-year Commuter College: $2,400 increase annually by 4.7% Public 4-year In-State On-Campus: $14,300 increase annually by 5.7% Public 4-year Out-of-State On-Campus: $25,200 increase annually by 5.2% Private 4-year On-Campus: $34,100 increase annually by 5.6% - Estimates of college costs in the future: Using data from the College Board and its website ( www.collegeboard.com), and assuming that college expenses increase by 5% annually, the anticipated cost of attending an in-state public college or university for four years beginning in 2026 is $148,000. For private institutions, the anticipated cost is around $353,000.
Don't be overwhelmed by these numbers. Resources such as scholarships, loans, grants and other forms of financial aid help to reduce these amounts, but rarely cover the full cost of attending college. That's why you should start saving now with the Start Smart College Plan.
2. The next step: Start saving as soon as possible after the birth of your child. The more time you have to save, the less you need to put aside each year. For example, putting aside $425 a year for 18 years will get you $10,000. If you delay and only have 10 years to save, you'll need to put aside $872 to reach the same $10,000 goal. While there is no guarantee for success, taking steps early and consistently from a very early date and throughout many years really does make a big difference–and will make it much more likely that you will achieve your goal of helping to pay for your child's college education.
3. Don't necessarily count on scholarships or financial aid. Some parents recognize that they will not be able to pay for their child's entire college education. Instead, they hope that scholarships, grants or other financial aid will fill the gap. The reality is that most financial aid is based on need and that the amount of financial aid available is generally tied to household income. The larger your income, the less financial aid that is available.
Some parents are afraid that if they save money for their child's education they will not qualify for financial aid. Financial aid formulas do take available assets and savings into account when determining the level of need. However, just because you can demonstrate financial need does not mean money is available. If you have the ability to save and can set money aside regularly, even if it is only a modest amount, you will be better prepared to help your child in college.
4. You may want to think of the Start Smart College Plan as one of several savings strategies. One of the most fundamental rules of saving and investing is to diversify your portfolio, since it is rarely a good idea to put all of your savings or investing dollars in one place. Generally, it is a good idea to have a solid foundation for any financial plan. This foundation should consist of safe savings vehicles that have little or no risk. The Gerber Life Start Smart College Plan is ideal, given that the maturity amount is guaranteed as long as you pay all your premiums. (Start Smart has the added benefit of life insurance protection that guarantees full benefit payment to your beneficiary if you were to pass away prior to maturity.)
On top of a sound foundation, you may want to consider adding other investments or savings alternatives that have more risk, such as 529 Plans or mutual funds. These investments have more potential for growth when the markets are doing really well, but they also have more risk when the markets go down, as we have recently seen.
The following graphic shows how you might use the Start Smart College Plan as a secure foundation upon which to build your savings strategy.
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The person whose life is insured is called the "insured" and the person paying the premiums is called the "policy owner." Generally, the policy owner and the insured are the same person, although this is not required.
Since an endowment policy provides life insurance, it is generally best to insure the person paying the premiums. For example, if a parent buys an endowment to help fund a child's education, the parent should be the insured. Then, if the parent were to die before maturity, the death benefit would fully fund the policy and immediately pay the lump sum to the beneficiary. NOTE: If there is no named beneficiary, the death benefit will be paid to the estate of the policy owner.
In the case where the owner and the insured are two different people–for example, if a grandparent pays the premium (owner) and the adult child is the insured–then:
- The owner will need the insured's permission to take out a policy on his or her life. In addition, the insured has certain rights to privacy over his or her medical information under a variety of governmental regulations. Consequently, the owner will have access to the insured's medical information and must have the insured communicate directly with Gerber Life.
- There must be an insurable interest between them. An insurable interest means that there is a relationship between the person applying for insurance and the person whose life is to be insured. In addition, there needs to be a reasonable expectation that the owner will benefit if the insured continues to live and that the life insurance will replace all or a portion of the economic value of that benefit.
For example, spouses, parents and grandparents have insurable interest in each other and their children.
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The person responsible for paying the premium is called the "policy owner" and the person whose life is insured is called the "insured." Generally, the policy owner and the insured are the same person, although this is not required.
Most commonly, the policy owner/insured is the parent of the child for whom the college savings are being accumulated.
The owner will receive the maturity benefit and can decide what to do with it, and has the right to name and change the beneficiary at any time by providing written notice to Gerber Life's administrative offices. The beneficiary will only receive money if the insured dies before maturity. The owner controls the cash value in the policy, can take loans against the policy, and is responsible for paying all income taxes due when the policy creates taxable income. If the owner dies before maturity, the policy's value will be included in his or her estate.
In addition to parents, another good choice as policy owner is an adult who has some financial responsibility for the child, such as a grandparent. Grandparents may find it attractive to insure their child and to make a grandchild the beneficiary.
Using this structure, the grandparent retains ownership of the policy and controls the naming of the beneficiary, the cash value, and the ultimate use of the lump sum paid at maturity. This structure will, however, make the grandparent responsible for paying income taxes on the cash value growth later on in the life of the policy. In addition, since someone other than the grandparent is the insured, no death benefit will be paid if the grandparent dies before the policy matures. A death benefit will be paid if the adult child–the insured–were to die before the policy's maturity.
If the grandparent is the policy owner and dies before the policy reaches maturity, either the adult child can continue to pay premiums or the grandparent could have a life insurance policy established that will pay enough premium to cover the endowment to maturity. Grandparents may also want to consider funding the endowment with a lump sum.
For example, if a grandparent has a Certificate of Deposit earning a low rate of interest, he or she may wish to use that money to buy a "paid-up" endowment. We can provide quotes on "paid-up" endowment policies if that is something that interests you.
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The sooner you start, the better. The Gerber Life Start Smart College Plan is available to adults aged 18 to 60. You can select a maturity period of 10 to 20 years.
There are advantages to starting sooner rather than waiting. Here's why:
- The more time you have to save, the smaller the annual contribution you will have to make to reach the same goal. For example, let's say your goal is to have $25,000 when your child starts college at age 18. If you were to contribute $1,000 per year for 18 years (starting when your child is born) Start Smart would provide $25,000 in 18 years, when your child would be entering college. However, if you delay three years (you don't start saving until your child is 3), you will have to contribute $1,377.50 per year for 15 years to get the same $25,000 when your child is 18. (This example assumes a female in good health between the ages of 18 and 25.)
- Starting earlier gives you the advantage of having time to make adjustments as your savings goals change.
- The easiest way to make sure you can reach your goal is to start early and save regularly.
- Think of savings contributions as if they were a monthly bill that must be paid. Another way to look at it: You are paying yourself. You pay all the other people who request payment from you, so why not pay yourself, too, by putting away savings each month. In time, this will accumulate to a substantial sum and provide you with the security of knowing the money is there.
Which would you rather pay–$1,000 per year
or $1,377.50 per year–to reach $25,000?*Contribute each year To reach goal Start NOW $1,000 for 18 years $25,000 Start 3 years from now $1377.50 for 15 years $25,000 *For a healthy 25-year-old female with an 18-year policy and
making an automatic (EFT) monthly premium payment.
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Yes, almost anyone can pay the monthly premiums on the policy. All premium payments are subject to Patriot Act and Money Laundering rules and regulations.
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Yes. In fact, you may find the idea attractive–paying all at once to secure a portion of your child or grandchild's education fund. Some people may wish to transfer the assets from a Certificate of Deposit and have it paid into a Start Smart College Plan.
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The Start Smart College Plan is a fixed-premium individual endowment. This means that it can only accept premiums one year at a time. Any lump sum would be used to pay the policy's premiums according to these steps:
- The first year's premium would be deducted from the lump sum.
- The remainder of the lump sum would then be put into a pre-paid premium account.
- Gerber Life will calculate a discount on the premium since the money in the pre-paid premium account will be credited with interest.
- Over time, Gerber Life will keep withdrawing the annual premium until all the money in the account is used.
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You would need to tell us how large an endowment you want and when you want it to mature, so that we could calculate how much money you need to pay. We also can tell you what size of endowment you could buy at various maturities for a specific amount of money.
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Yes, if you sign up for automatic payments from your checking or savings account you will not only save time but you'll save money. You can save up to 8% on your premiums. Payments can be made monthly, semi-monthly, quarterly or annually. Just call us at 1-800-253-3074 and one of our representatives will be happy to help you.
