<p>If a spouse dies this calendar year and the other spouse is the beneficiary of a life insurance policy payout roughly double the annual income of the family, how will this impact the financial aid app process for their child who will be applying to college for fall 2013? At least half the life insurance payout will be needed to pay off debts incurred from dead spouse’s inability to work in past two years due to illness and medical bills. Much of the rest will be needed to keep family going while living spouse finds full time work again.</p>
<p>I’ll give it a shot, and hope I am right… By law, life insurance death benefits are generally excluded from income tax to the beneficiary. So it’s not your income but I would think the remaining proceed is counted as assets. Like when you file FAFSA, they ask how much money you have in saving/checking accounts or cash on hand, do they?</p>
<p>Sorry to hear about the death of your spouse. </p>
<p>The payout may not be taxed, but it may get counted as “untaxed income”. There was another widow that had a similar situation.</p>
<p>Your child may need to take a gap year so that the money can go to bills and not be a part of the following year’s aid applications.</p>
<p>If that’s not an option, then have your child apply to some financial safeties where large merit will be given.</p>
<p>Schools may take into acct that some of the money will go towards medical bills, but not dollar for dollar. I don’t know how they’ll handle paying off debts from unemployment. There sometimes is consideration, but not dollar for dollar.</p>
<p>Also…if your child will be applying to schools not known for great aid, it may not matter much. </p>
<p>You need a strategy to cover various scenarios.</p>
<p>Tax part: “Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.” See [Publication</a> 525 (2011), Taxable and Nontaxable Income](<a href=“Publication 525 (2022), Taxable and Nontaxable Income | Internal Revenue Service”>Publication 525 (2022), Taxable and Nontaxable Income | Internal Revenue Service). The reason I think it would be treated like assets because you have to keep that proceed in bank or in cash. And you have to report that amount on FAFSA. Just my logical thinking. I am not too sure about the FAFSA part. I am sure about tax part. (Edit: I found some blog that agrees with what I said about FAFSA, but they don’t quote any legal authority. Think you should call up the school!)</p>
<p>You may have the option of converting some or all of the proceeds into a beneficiary IRA or annuity, you may also have the option of leaving some or all of the proceeds with the insurance company for a certain number of years before you have to take possession of all of it. Sit down with the agent, and find out all of the options that are open to you before you accept the money.</p>
<p>[FinAid</a> | Professional Judgment | Proceeds from a Life Insurance Policy](<a href=“Your Guide for College Financial Aid - Finaid”>Your Guide for College Financial Aid - Finaid)</p>
<p>Unlike most of the good stuff on finaid.org, this is unclear (at least it is to me). Hopefully kelsmom, who until recently was a FA professional, will comment.</p>
<p>Hilldweller,</p>
<p>Are you asking this for someone else?</p>
<p>What it seems to me is that you have to report the proceeds as untaxed income. You then can ask the colleges to make adjustments as it is a one time disbursement and if there were expenses that can be identified to the disability and death, those may be excluded. As far as being a reportable asset, yes, what is left of the money is reportable as long as it is sitting in an asset that is reportable. If it was used to pay off the mortgage, then it’s gone, zip, not reportable. If an annuity or an qualified plan contributions was made with it or if it was just plain spent, it won’t be there to report.But it isn’t going to be tracked and segregated as an asset from those proceeds unless there is some big fat liability attached to it that has to be paid that is medical in nature or otherwise excludable.</p>
<p>I agree that Kelsmom would have the most accurate answer as to how a fin aid office would handle the situation. I remember this happening at one time and though the school was fine as far as changing it for FAFSA purposes so that federal EFC would be affected and possibly make the student eligible for federal benefits such as PELL or loan subsidies, if the school is a PROFILE school, they are not usually so inclined to exclude the payout without direct evidence of where the money went (for medical bills, for example). In that situation that I knew, the college,which met full need, regarded the policy payments as income. Once the income was dispersed and turned into assets, the lack of income would be addressed in subsequent years. In such cases, it might be a good idea to take a leave of absence until such a blip in income is not being taken into account, if it makes a big difference in financial aid.</p>
<p>Friends of ours got an early retirement payout which went directly into a business which was needed to generate future income. College did not care. Still included the lump sum payment and the kid was not eligible for aid that year. IT was not a whole lot he was getting, but every bit counted in their situation, so he sat out the year. Got his $10K or so award again.</p>
<p>Yes. A relative</p>
<p>Hilldweller – the guidance on this one is that it is up to the financial aid officer at each school to decide whether to exclude some of the life insurance proceeds. You would need to make a special request with supporting information.</p>
<p>But…assets are valued on a single day. If the life insurance proceeds come in before that date, and a big chunk of them are spent to pay accumulated bills before the date that the FAFSA is completed, the funds aren’t there to be assessed (or at least some of them aren’t). If the remaining proceeds are used to either pay down debt (paying off cars or a house, perhaps) or to purchase an annuity to provide ongoing income for the spouse, then the funds aren’t there come the FAFSA date either. </p>
<p>Just as a note: FAFSA and tax accounting are not very closely related. How something is handled on a tax return is not predictive of how it is treated for FAFSA purposes. FAFSA is much more expansive.</p>
<p>The life insurance is a tough one in terms of how colleges will view it. It will always be viewed as an asset, until spent since colleges don’t care how something became an asset. But to be hit as income is a tough blow since the money is often supposed to provide future income to the survivors over many years, not be counted as a one time windfall. Schools will look at it differently, and you do have to talk to the financial aid directors. </p>
<p>In many cases, it won’t make any difference. If a school does not meet full need. it just isn’t going to do so anyways. Getting a pass on the insurance proceeds may not make that much difference if they weren’t going to give the money anyways. I’ve known families who have gone through the whole paperwork and research route working with financial aid directors who bend over backwards to give them every break available, for a measly $100-1000 which was all the school had to give them when the dust cleared. DIdn’t matter if the EFC was a big fat zero and they lived in a cardboard box. The school didn’t have the funds.</p>
<p>Also keep in mind that if they take the proceeds and pay off thier mortgage the school may then consider the home equity an asset, depending on the school.</p>
<p>Life insurance payout will be in neighborhood of $120K, so not a huge sum. Half will go to pay debts/medical bills. Balance won’t be used to pay down mortgage. Does one compose a general letter of explanation to be attached to FAFSA? Or do you send individual letters to each college? </p>
<p>We did not have to do financial aid process when our kids went to college and I am trying to get a jump start to gently help relative during a very difficult time…</p>
<p>Hilldweller – as long as the payout and expenditures occur BEFORE or AFTER the FAFSA is filed, there is nothing to report. It would simply be prudent not to have the proceeds in the checking/savings/insurance company account at the specific time the FAFSA is filed, since that is when assets are judged. </p>
<p>I am so very sorry that the family is dealing with a situation like this.</p>
<p>Has the parent already died? </p>
<p>A portion of the insurance will likely go towards funeral costs, medical bills, and keeping the family afloat while mom finds employment. </p>
<p>I think it might be best in the long run for the student to take a gap year because then the money will all be gone and the only income will be mom’s income.</p>
<p>That said, if the payout won’t be reported as untaxed income and she can pay off the debts before she files FAFSA. She could have several months of living expenses before she files FAFSA, so those savings would be gone as well.</p>
<p>BTW…funeral costs can really get out of hand (been thru 2 in the last 18 months). Encourage her to be conservative in this area. Certainly her H would prefer that she preserve as much as possible for their living expenses until the wife can find full employment.</p>
<p>When you consider that one reason for taking out a life insurance policy is to cover college for your children it would make sense that it is counted as an asset…I agree it is not “income”. I can see how, if the funds are available, it would be counted. If the funds are spent on other family debt then the funds would not be available and would not be counted. If the funds are disbursed, but not spent, before FAFSA filing then a meeting with FA might be in order, with proof of other bills to be paid. If there were not other debts, would people still expect the insurance not to counted as assets? Like, I said, having $ to pay for things after you are gone is why you take insurance. You don’t get to keep it on one hand, and say you have no $ on the other…</p>
<p>I am talking in a lot of generalities here, not to the the OP situation. If there is a lot of medical debt etc, then I’m sure the school will take it into account. Every situation is different.</p>
<p>Will there be social security survivor benefits for the children. That will keep the family going until the survivor finds work. Once he/she has an income that pays the bills I hope the SS $ is banked for college expenses. (as opposed to the kids spending it willy nilly–a 16 year old neighbor spent his on a quad and a dirt bike, in a neighborhood where it’s illegal to ride them)</p>
<p>The way I read it is that the life insurance proceeds CAN be counted as income. They do have to be reported as untaxed income on the FAFSA. I think that individual schools need to be contacted as to how they treat the income and what associated expenses they need to offset it if they are going to do so. A person could have a million dollars in life insurance or more. The family can pay off the mortgage and spend it all on a lot of things. Or a family who loses the wage earner could have zero in life insurance. It’s income that should be considered, logically, the year the family member passes away, but with heavy consideration to funeral expenses and medical costs and other such things. </p>
<p>However, it’s not what makes sense or what we think that holds. It’s what the rules say and how the colleges look at this. It seems to me from reading the FAFSA that life insurance proceeds do have to be reported as non taxable income. Take a look at the rules on it. Certainly CSS Profile would do the same. But with FAFSA, I would think that Fin aid officers can make certain determinations to exclude certain amounts so that PELL eligiblity and other federal aid is not affected. I don’t see any school giving out their own money, however, if a large insurance proceed is received in the key year.</p>
<p>Again, the amount of the insurance payout will be around $120K and about half will be spent paying off medical bills and debt incurred as a result of illness and her inability to continue working as cancer progressed. Family income is now about $70K. Funeral costs paid for and done. In addition to HS junior, there is a middle schooler. Family owns modest home with mortgage. Yes they have just learned there will be some kind of SS survivor benefit that will be $1,000 a month until oldest becomes 18 or something like that. But husband does not get health insurance and COBRA will run out less than a year and they will have to buy insurance–big expense. </p>
<p>So, not to appear ignorant, but family will have to complete FAFSA and CSS Profile? Anything else I need to have them be on top of? As I said, with our two kiddoes, we didn’t go through any of this. I want to be able to be a gentle helper if I can…</p>
<p>Thank</p>
<p>Yes, the family will have to fill out FAFSA if they are going to have a student in college and want fiancial aid. Most all colleges require that. CSS PROFILE is not always necessary, but schools that require that tend to be the ones more generous in financial aid, though they also define their own need. </p>
<p>The issue should be raised with each financial aid office as to how insurance payout has to be reported. From what I have heard, financial aid counselors tend to be generous with how the payout is counted for FAFSA purposes in that it helps the student get more government funding. But unless the income is very low, that usually means eligibility for subsidized loans. Not really a big deal. As to how an individual college is willing to fund the family with its own money in terms of financial aid is truly up to the fin aid counselors. </p>
<p>If it appears that the payout is a true impediment in getting good financial aid, I suggest that the student take a gap year, until the dust clears from this payment. Unless a school is one that guarantees to meet need, however, it will be difficult to see whether the insurance is a factor or if the school is just gapping as usual, as most schools do. The insurance proceeds at such schools could just be a smoke screen. BUt if the student is accepted to schools where 100% of need is provided, and it is clear that these proceeds are an issue that the schools could not get around, then he needs to take that gap year and reapply for financial aid when that payment has cleared.</p>
<p>Hilldweller, what sort of schools is this high schooler going to be seeking? At the $70K income level, it is doubtful the student would qualify for PELL. Does the state have any low income program that gives grants and would they make the cut off? Because otherwise, as I mentioned above, there really isn’t much more than loan subsidies on $3500 of Staffords (something that may be endangered the way things are going politically). The rest comes from the colleges. Where it would make the most difference is with the colleges that are selective as they tend to be the ones that have the funding to meet full need for students. We are not talking about very many state Universities when we are looking for schools that meet full need, but the highly selective privates that are have a much higher sticker price.</p>