Though the calculation of an Expected Family Contribution (EFC) is quite formulaic, there are three unique options families can take to reduce their EFC and receive the most assistance. In Episode 34, we reviewed the first option which was a MEC whole life contract. The second option is to use a Stacking Multi-Year Guaranteed Annuity (MYGA). What we like to call a "CD alternative".
In this episode of Money Script Monday, Gabriel continues the conversation and reviews the second option families can take to reduce their EFC by utilizing a Stacking MYGA.
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Hello. Welcome back to another episode of Money Script Monday. My name is Gabriel Lindemann, and I'll be your host today.
Today, we're going to be talking about EFC option number two for college funding, which is going to be emphasis on college using MYGA to pay for college.
So, with that in mind, let's get started.
Why would somebody want to use a MYGA? They'd use it for the guaranteed rates of return.
On the previous episode, we used a money market account alternative, which I would also reference as a MEC whole life policy.
The reason why they use the MEC was for the guaranteed growth, and we're looking at 1% to 3%.
Same scenario, except the families need higher rates of return. So with a MYGA, depending on the years, from three, four to five, we can get anywhere from 2.5% to 3.5% percent growth.
I know what you're going to say. Gabe, that's not a great rate of return. 3.5%? I can do better in a mutual fund.
You're correct. But is that guaranteed?
I could do better at the bank. Actually, you can't.
If you look at a 5-year CD, those rates are anywhere from .75%, and if you're lucky and you invest over a million dollars, maybe 1%.
So in reality, for fixed rate short term, a short term MYGA is offering the best guaranteed rates of return out there.
And some are 300% higher than what you get at a bank.
Why would a family use that scenario? Well, it's purely an EFC move. So, let's give you a couple different options.
Family Scenario 1
- EFC eligible
- Non-qualified assets
The non-qualified assets are keeping them from being rewarded financial aid, grants, and scholarships. So, they put that money into a MYGA to let it grow.
They don't know they're going to actually receive any financial aid, because it's really dependent on the government or the schools.
They have some money and split it up between a three, four, five, and six.
So, by the year the kid graduates, there's going to be a lump of money, that guaranteed growth, that if they don't receive enough financial aid, it'll be there to cover the college cost expenses.
That's option 1 and that's pretty much the typical MYGA sale right there.
Family Scenario 2
- In college
- Received lump sum of money
Because they're already receiving financial aid, maybe inherited money, or won some money, they are not EFC eligible.
So, they have to move that money immediately to something short term, so when the kid graduates it'll be liquid upon that time.
That's the second option that's very popular for MYGA.
Family Scenario Summary
First time they need better guaranteed growth in a MEC whole life option. And the second is if they have it, they just need to shelter it and then let it be done by the time the kid graduates.
That's typically the two scenarios when families would use a MYGA option. Or as I call it, a CD alternative option, because honestly, it really functions the same way as a bank CD, if you understand how bank CDs work.
Pros vs. Cons
Now, let's transition to the second point. There are pros and cons to everything.
Nothing is a great solution for every family. Every family has their own needs and desires. And different situations, frankly.
Pros of MYGA
Let’s look at the pros.
1. Guaranteed growth
We're averaging anywhere from 2.5% to 3.5% from MYGAs from three years all the way to six years. That's a great guaranteed rate of return.
Again, when you compare it to the banks that are offering 1%, if you give them a million dollars, you look like a hero when you're giving them 3.5%.
2. No cost of insurance or fees
One of the advantages to the MYGAs is there are no fees and no cost of insurance.
$100,000 after first year, you see credited. It doesn't go negative either.
With life insurance, there's cost of insurance and fees. It takes one to two years to break even for the growth.
3. No underwriting
With a MYGA, pure growth after day one. It starts earning interest all the way through. No underwriting.
This is a typical scenario too. Sometimes, families, they want to do a whole life option for the guaranteed growth, but they have health conditions.
They might be uncontrolled diabetes, heart disease. Who knows?
There's a plethora of issues that would make them uninsurable, but the advantage is with the MYGA, there's no underwriting.
As long as they pass suitability review and they have enough assets to justify putting money away into a fixed product, it's an easy, slam dunk sale.
And they don't have to go through underwriting, so they could have the opportunity to get better.
At the time when the money is liquid, they then can reinvest in something different as an IUL or a whole life option that has a better upside potential for long term growth.
4. Superior rates of return
The rates of return you're going to get from a MYGA is anywhere from 300% to 500% higher than what the banks are offering.
When you look at 3.5% you might say, "That's not too great. I'm able to get triple that in the market." Correct.
But that has risk and those aren't guarantees.
It doesn't shelter that money from college for financial aid. So, you're able to get 300% to 500% guaranteed rates for return higher than what the banks are offering.
Cons of MYGA
Let's talk about the cons, because everything has good and bad.
1. EFC move only
Just like a MEC whole life policy, it's not designed for long term growth.
At 3.5%, even though that's great, that's not going to keep up with inflation over the next 20 years.
So, it's purely a short term move only.
2. Access limitations
One of the things you have to know if you need access to the money, you can't get it.
There is surrender charges applied. So typically, they do allow 10% free withdrawal or interest only free withdrawals, which again, 3.5% at 10% is a lot better than you would even be getting, compared to a bank CD.
But, you just have to understand it's not fully liquid.
If a client puts in $100,000, and the next year they need $25,000 or $30,000 to come out to pay for a college tuition, it's not going to work.
It's not designed that way, and it's built that way not to allow it.
3. Surrender charges
Like we've been hinting at, if the clients decide if to buy a 5-year MYGA and in policy year three they need access to the funds above the 10%, there's going to be surrender charges.
This is the way to protect the insurance company, the carriers, because they're reinvesting that money to prevent you from pulling the money early because it hurts them.
So, they're able to offer you better rates of return, but you have to keep it there for the full duration.
This is the most important thing; a lot of college planners don't realize this.
Some profile schools, the top private schools in the country, they count annuities on the profile school assessment.
So keep that in mind. Not all schools do. Some of them do, and typically in my experience, the top private schools do.
It can actually do more harm than good if you're not working with a real college planner, they might not know that.
Put the money into an annuity, and it hurts you in the long term because you're actually not winning, meaning financial aid, grants, or scholarships.
And lastly, one of the benefits is access to your cash. Like I said before, it does allow a 10% free withdrawal in most MYGAs.
It is fully liquid after the surrender period, which is beneficial.
If you put your money into a 5-year MYGA, at the end of the five years, that amount of money is fully liquid plus interest earned.
You can reinvest it, you can keep it with the MYGA with new rates, if it's feasible and it makes sense. Do whatever you want or put it in the bank.
The point of the matter is, it's fully liquid after the surrender period.
And what's really good about that is reinvestment on opportunities. At the time, if you're out of school, you don't need to worry about 3.5%.
You can be a little bit more aggressive and you can maybe put it into an assets under management portfolio, a mutual fund, an IUL, something that has more upside growth.
It's your money and it's fully liquid, which is very important.
Stacking MYGA Recap
To be honest with you, every family's position is different.
It would be impossible for me to stand up here and say, "You know, the MEC option is best for you. The MYGA option is best for you." Or, "The IUL option is best for you."
Every family is different.
And any college planner or financial planner after having your initial consultation says, "This is what's best for you," without doing a full assessment of the schools, a full assessment of the student and the family's needs, you shouldn't be talking to them.
There is a criteria and a way to sell it to make sure what's best for the family's needs, and that's the benefit of working with a certified, a real college planner.
In the future, if you have any questions about this, please contact a real college planner, and they can determine which is the best option for you and your family. Thanks again.