It’s no secret that the cost of a college education is skyrocketing. In fact, in some cases, it can be cheaper to buy a nice sized home in the suburbs than it is to fund four years, even at an in-state institution. College graduates today are leaving school with higher amounts of student loan debt than ever before – and its taking decades to pay it off.
Given that, one of the best gifts you can give a child or grandchild is that of a college savings plan – and in the past, the 529 plan has been a popular way to go. According to the College Savings Plan Network, there is now in excess of $258 billion being held in these types of plans – which has come primarily from new accounts being opened every year.
But one question people are beginning to ask themselves is whether or not the 529 plan is really the best option when it comes to saving for a loved one’s future education. This is because, when comparing these plans with putting funds into permanent life insurance, the insurance actually comes out ahead in terms of flexibility, while at the same time still offering many similar tax benefits.
Let’s take a closer look.
Studying the Differences Between 529 College Savings Plans and Permanent Life Insurance
When considering a permanent life insurance policy as a college savings vehicle, there are two key benefits that can be accomplished. First, the funds that are in the cash value component of the life insurance policy are allowed to grow on a tax-deferred basis. This means that no tax will be due on the growth of those funds unless or until the time of their withdrawal – in turn, allowing them to grow and compound exponentially over time.
These funds are also guaranteed not to lose value if they are in a permanent life insurance plan such as a whole life or universal life insurance policy. Funds that are in a 529 plan and, in turn, invested in market assets could essentially end up losing value – especially in light of a market crash.
For example, if the student was planning to use the funds in the 529 plan, but another market downturn similar to 2008 occurs, the student may be out of luck when it comes to his or her college funding source.
In addition, unlike a 529 college savings plan, a permanent life insurance policy will also have the extra added advantage of the death benefit proceeds. This means that if the parent or grandparent (or whoever is funding the savings plan for the prospective student) were to pass away, the child – who would be named as the policy’s beneficiary – would still have funds available, income tax free, for his or her education.
Additional Flexibility Features of Cash Value Life Insurance
In addition to the added protection that life insurance can offer as a college savings vehicle, there are other features that can also help to make it much more flexible. For example, according to the IRS, the funds that are inside of a 529 college savings plan are essentially limited to “qualified education expenses.”
What this means is that the money that comes out of this type of account can only be spent on education-related items, such as tuition, fees, room and board, and books. The money that is in your life insurance policy’s cash value, however, can be spent on whatever you decide.
Also, if your child or grandchild should also require some type of financial aid in order to obtain the additional funds that he or she needs for college, a 529 college savings plan will need to be reported. The cash value that is in your permanent life insurance policy, however, will not.
A 529 plan can actually affect financial aid eligibility in one of two ways, depending on who owns the plan. If, for instance, the 529 plan is owned by a dependent student or by that student’s custodial parent, then it would be reported as a parent asset on the FAFSA (Free Application for Federal Student Aid). A plan owned by a student who is independent would instead be reported on the FAFSA as an asset of that student.
However, if a grandparent owns the plan, it doesn’t have to be reported as an asset on the FAFSA. But, the distributions from the 529 plan would have to be reported as untaxed income to the student / beneficiary – which in turn could have a big impact on the student’s eligibility if he or she required any type of need-based financial aid.
Getting Your Plan Set Up
Getting your life insurance plan set up really isn’t complicated – however, finding just the right plan for you can take some time in order to ensure that you’re using the proper policy and benefits that will work the way you intend them to.
It’s also important not to wait too long to get things put into place. Because these plans run on a life insurance chases, your health will play a part in the qualification process. So, when you’re ready to move forward, working with an independent insurance agency can help you to sort out all of your potential options in the most unbiased manner possible. Having access to multiple carriers can be a great way to determine the very best plan to fit in with your specific needs, goals, and planning time horizon.
Bio:
Brad Cummins, founder of LocalLifeAgents, a Columbus, Ohio-based firm of independent insurance agents.
