529 Plan vs. Life Insurance
The Media Debate
It’s hard to turn on the TV or listen to the radio nowadays without hearing a commercial about investing in a 529 plan or buying insurance as a way to pay for college.
A certified financial planner is an excellent resource to help find out what route is best for you, but in the meantime, we have some information and a great graphic to cover the basics.
529 Plan: Pure and Simple
The 529 plan is a pure investment vehicle with tax-deferred growth and tax-free withdrawals when used for qualified higher education expenses. Qualified expenses include tuition at a college listed with the Department of Education, room and board, and necessary supplies.
Depending on the performance of your 529 plan’s portfolio and how much you contribute, it may cover your child’s college education. With some college bills reaching $60,000 or more each year, there is a lot that needs to be covered.
Comparing Life Insurance to the 529 Plan
Who Gets the Money
The life insurance alternative does provide some benefits over the 529 plan.
The cash value portion of your life insurance product grows tax-deferred just like the 529 plan, but you can withdraw or borrow from the cash value for just about any reason. This can be done tax-free and without penalty, depending on the terms of the policy and the law.
It doesn’t have to be used for tuition at an institution of higher learning like the 529 plan, it can be used for vocational school, a university abroad, a vacation, or even to supplement your retirement.
Federal College Assistance
When it comes to applying for federal student aid (FAFSA), the value of any 529 plans you or your child have will come into play.
The more assets you have, the less aid you will receive. If your child owns the plan, 35% of the value will be counted. If you own it, 6.74% will be counted. If it belongs to a grandparent, none of the value will be counted.
With life insurance, none of the cash value is considered when seeking federal student aid. However, each school has its own rules for granting financial aid to students.
The Insurance Component
With a 529 plan, if you die before you’ve had a chance to put away enough money to cover your child’s college tuition and expenses, his or her future could be left hanging in the balance.
With the life insurance alternative, you have a death benefit to protect against that possibility, even if the cash value isn’t sufficient on its own. If you live long enough to use the cash value to pay for your child’s college, the death benefit remains and continues to grow.
With a life insurance policy, you can choose as many beneficiaries as you’d like, and change them at any time. You can even choose an organization as your beneficiary, such as a church, charity, or business.
With a 529 plan, you can pick any person you want initially, and change the beneficiary at any time, but the new beneficiary must be a member of the prior beneficiary’s family.
This can be a problem if the initial beneficiary decides not to go to college and there is no family member to switch your beneficiary designation to.
You may be forced to withdraw from the account and pay a 10% penalty in addition to all of the taxes. Speak with a certified financial planner if possible for your specific situation.
Making Premium Payments
Most insurance benefits are only effective if you keep making the premiums on schedule.
With a 529 plan, you can skip a year, or even stop making contributions after the first year, and your account will stay active, giving the money a chance to grow on its own.
Growth of Funds
The cash value of a life insurance policy generally doesn’t begin to build up for quite a few years, so it’s best to open the policy when your children still have a decade or more before college. Also, the younger and healthier you are, the more your premium contributes to the cash value.
With a 529 plan, if the portfolio performs well, you may not need to continue making contributions year after year to cover the cost of tuition for your children.
What About Rate of Return?
Ultimately, we are in this discussion because you’ve got kids you want to put through college. So the first question you ask yourself should be whether or not the life insurance product really moves the ball in that direction.
A death benefit is nice, but if you don’t die, will the cash value be enough to actually pay for your kids’ college? That’s why it’s important to determine what kind of growth you will actually see in the money you allocate to ACME Life Insurance Company instead of a 529 plan.
Certainly, life insurance coverage is a necessity when you have a family that depends on your paycheck, but it’s important to remember the possibility that you may actually live to see your kids’ first college tuition bills and be expected to pay for them yourself.
It’s pretty enticing to hear the insurance company say your money is guaranteed, unlike the 529 plan, which suffers the tides and turns of the stock market.
However, although there are significant benefits to life insurance policies that you should consider, sufficient cash value buildup must also take place within the necessary time frame.
Do Your Homework
If you don’t qualify for life insurance or are willing to risk the possibility of your kids not going to college because of your premature death, then a pure 529 plan will usually win on asset accumulation alone.
But if you do need life insurance, the comparison is much closer. Remember, each life insurance policy is different and your circumstances may or may not fit into the policy’s success model. That’s why it’s important to do your homework and ask questions before you sign on the dotted line.
At Medallion Financial Group, we believe financial planning is about Family. We have been helping families invest in the future since 1987 through a holistic planning approach. We recognize there are a variety of needs when it comes to retirement planning, plan rollovers, annuities, college planning, life insurance options, and investment management. It is easy to get lost in a sea of choices. Our financial advisors help with the basics and beyond to enable our clients to get the education, advice and management they need to retire with confidence.
Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.
We strive to exceed client’s expectations – because we have high expectations of ourselves.