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Your financial goals, obligations, and flexibility are essential elements when choosing a life insurance or 529 plan. A 529 plan helps you save for future college costs while life insurance protects you and your family. Some life insurance policies offer flexibility to withdraw funds or pay for loans and college fees.
Yes. Savings in the 529 plan are used for education, while life insurance policies are more flexible. Permanent life insurance cash allows you to use the cash in a manner that you wish. If you have more obligations besides education, buy both.
The life insurance policy gives financial security for the future. When premature death happens, the death benefit can be used to pay for college. The 529 is a good college savings plan.
State-run 529 plans are like a Roth 401(k) or Roth IRA but are intended for educational and not retirement savings. You can invest in mutual funds, and earnings are tax-deferred for your 529 plan. The IRS inspects the educational expenses; hence withdrawals will be tax-free.
Most states offer tax deductions or credit for your contributions to their plans to add their appeal. There is, however, no federal deduction or credit for your contributions.
While 529 is the most preferred way for saving for college, you can take the permanent life insurance. Unlike the term life coverage, it has a tax-deferred savings component.
For every dollar you pay as premiums, a portion goes toward the death benefit while the rest is held in a cash-value account. Whole life insurance is the safest form of permanent life insurance. Many policyholders expect a return of between 3% – 6% after paying some years. The amount may vary depending on how the investment performs. Meanwhile, money in the cash-value account grows tax-deferred like a 529 plan.
Variable life insurance is another form of permanent life coverage. Policyholders have some control over their investment. You select sub-accounts (mutual funds) that you want in your account. The annual return is based on how the underlying investments perform. There are greater returns and high risks on your investment.
When you have a child joining college, you can take a loan against the cash balance. If you do not pay the loan, the death balance is reduced. It can work perfectly if you intend to use the balance for college funding.
Life insurance has more benefits than the 529 plan. One is flexibility. If your child decides not to join college, earnings in the 529 are subject to ordinary income tax and a 10% penalty, but contributions are exempted. A beneficiary in a lower tax bracket can withdraw the funds. Life insurance beneficiaries do not face these taxes. In the 529 plan, you can name another beneficiary.
Life insurance is not included in financial aid calculations, while money in the 529 plan is considered a parental asset. Up to 5.64% of parental assets are counted in the applicant’s Expected Family Contribution for every year in college.
Permanent life insurance upfront and recurring fees that make stock and bonds look like a deal. Nearly 50% of first-year premiums are used for representative’s commission.
It may take up to 10 years for your cash value to surpass what you have paid in premiums. You need to start building your policy early if you intend to use it for college fees.
The heavy annual expenses weigh down your earnings. Most permanent life insurance policies charge up to 2% administrative and investment costs annually. This is different for 529 accounts. A 529 account sold directly had fees of 0.39% in 2018, according to a report by Morningstar in May 2019. Advisor-sold funds are slightly expensive and average 0.93% fees.
Whole life insurance policies are perfect for saving for college if you start saving early. However, the simplicity and lower fees associated with the 529 accounts make them a better plan.
A 529 account is a smart way to save for college expenses and has advantages over a standard brokerage account. You can grow your savings tax-free and get some state tax incentives for your contributions.
You can not lose money in your 529 accounts. Even if the beneficiary does not need the money, it is still yours. The money can be used for post-secondary education or even for yourself.
A 529 plan only has one beneficiary. You need to open a separate account for each child. The contributions are considered gifts for tax purposes, and you can save up to $15,00 per beneficiary (in 2018) and $30,00 for couples.