The 529 Plan began to materialize in the mid 1990’s taking inspiration from prepaid tuition programs in the state of Michigan.
Since the initial formation it has become the dominate recommendation among financial gurus for college savings in the United States—despite President Obama’s suggestion that we end the tax free distribution 529 Plans enjoy during his 2015 State of the Union Address.
Despite the overwhelming support the financial media expresses for 529’s Americans still overwhelmingly choose basic savings accounts to save for college.
I can actually share in the frustration that many financial talking heads may have in the lack of wider acceptance 529 Plans have achieved, but I also understand the anxiety Americans feel over the perceived risk 529 Plans represent.
Life insurance used as a tool to save for college expenses is a strategy that stretches back for many decades, but its use is less well understood both by the general public and (sadly) most licensed insurance agents.
To help shed some light on this powerful and low risk plan, we decided to prepare the five reasons why whole life insurance (and universal life insurance for that matter) are better than 529 Plans (and pretty much all other options).
529 Plans accumulate tax deferred and one can use the funds tax free if and only if the funds go towards specified qualified expenses.
Paying for expenses like: travel, computers, insurance, or housing in excess of university stated prices with 529 assets creates taxable consequences plus penalties. Life insurance faces no limitation to “qualified expenses.”
In addition, if your child decides not to go to college a crisis does not ensue. You can use the funds in a life insurance policy for anything, it’s easy to pivot and pay for something completely outside of realm of post-secondary education.
529 Plans have restrictive contribution limits. There are maximum imposed limits to qualify as 529 Plans. These limits are assumed to be the maximum cost of attending college and are generally several hundred thousand dollars.
But, contributions beyond $14,000 per person are generally subject to gift tax considerations (though 529 Plans have a unique ability to accept a lump sum contribution of $70,000 per person without gift tax consideration).
Whole life insurance has no specified contribution cap or gift tax implications for making contributions beyond $14,000 per year.
Life insurance cash values are not presently disclosed on the Free Application for Federal Student Aid (FAFSA). 529 Plans count as parental assets at 5.64% of total plan assets towards expected family contribution.
Life insurance can also be used for those who have procrastinated a bit on planning for college financial aid to immediately shelter assets from financial aid consideration.
529 Plans really aren’t that bad, but they do nothing for a future Rhodes Scholar hopeful if a primary wage earning parent dies prematurely.
Life insurance, on the other hand, is life insurance—after all—and comes with a death benefit that can easily and immediately cover the cash needs to pay for college. Life insurance can also be designed to ensure the contributions are made if a primary wage earning parents becomes sick or hurt and can no longer work.
There’s an important implementation stumbling point I want to note. When using life insurance as a college savings tool, the parent—not the child—should be the insured.
Diversification is primarily a task of insulating yourself from losses created by declining asset prices. There was a time when we believed mixing asset classes like bonds and stocks would mostly accomplish this goal just fine. However, since 2008 these generally uncorrelated assets appear to be rather tightly correlated.
I’ve been advised that using fancy-pants terms like “non-correlated assets” runs the risk of losing my audience.
Without flooding you with details that might make your brain hurt, simply know this, when the stock market declines, life insurance remains perfectly unaffected and that makes it a wonderful asset to protect against market corrections and economic recessions.
Life insurance is neither worried about absolute loss, nor the specific timing of said loss. This eliminates the worry that a correction will come along in your child’s senior high school year and dramatically rejigger his or her college choices due to affordability.
While life insurance as a college savings plan may not be for everyone, it’s an approach to saving that is well worth serious consideration. It provides an array of benefits that far exceed the features found in 529 Plans.
It’s also noteworthy that life insurance can achieve a rate of return that competes favorably (or even exceeds) returns found in 529 Plans.
If you'd like to consider using whole life insurance to save for your child's education and not be hemmed in by the restrictions of a 529 plan, contact us, we'd love to help.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.