A New College 529 Fund Alternative
The most common strategy for college savings is to invest in a 529 Plan. The money put into this is with after-tax dollars, but the good news is that the investment will grow tax-deferred and you will have access to the money on a tax-free basis if the money is used for a qualified educational expense.
The drawbacks to a 529 plan is that you are invested in the market and subject to market volatility. Imagine your child was starting college in 2009. Their 529 plan just went down 45% with the market crash and now you have to take money out to pay the tuition. Would you feel comfortable in your ability to pay for your child’s education relying solely on this type of investment?
Another issue with the 529 plan is that a lot of parents do not like the requirement that the money has to be used for a qualified educational expense. If you spend the money on something other than education, you will have to pay regular income tax plus a 10 percent penalty, but only on the earnings, not on the amount deposited.
A safer and more flexible option is to utilize a whole life insurance policy. Whole life provides guaranteed premiums, death benefit and cash value that won’t decrease because it is not tied to the stock market. Any dividends paid will enhance the cash value and death benefit.
In a whole life insurance policy your cash value will grow tax deferred and you can borrow cash via policy loans for college or other uses without being taxed. If your child decides not to go to college they will also be able to use the money for other ventures.
Another popular feature of using a life insurance policy to fund a college education is that it is not counted as an asset under current FAFSA financial aid guidelines. This means that the cash value in your life insurance policy will not count against your child’s ability to get financial aid.
If you are okay with taking less guarantees, we also recommend an indexed universal life insurance policy. These historically get a slightly better return than whole life policies.
The one drawback to a using a life insurance policy for a college savings plan is that they need to be properly funded with at least $500 to $1000 a month to create enough savings to help fund an education. Let us know if you would like to learn more about saving for your child’s or grandchild’s future education.