Whole/Permanent Life Insurance vs. 529 College Savings Plans: Best Way to Save for Your Child’s Education

At the top of parents’ long-term goals for their children is making sure their children receive a high-quality education.

But as college costs climb and climb with no end in sight, it’s become harder each year to

afford a high-quality college education without taking on a crater-sized debt. The most popular vehicle parents use to save for their children’s college education is the 529 College Savings Fund. But lately, a newcomer has entered the fray: Whole Life Insurance.

Well, it’s hard to call whole life insurance a “newcomer” because it’s been around since

Civil War – before a college education was even considered a possibility for middle-class

families.

Nevertheless, whole life insurance has also become a popular way to save for college –

giving parents two strong options. This discussion will sort out the pros and cons of both and show you which one is truly the best way to save for your children’s college education.

529 College Savings Plans

College saving plans (commonly referred to as 529 plans) have gained much fanfare in the past decade – especially as tuition costs rise while the average American’s salary remains stagnant.

1. Indeed, there’s a lot to like about them. First, as most know by now, accumulated earnings are tax-deferred and withdrawals are exempt from federal income tax and state taxes when used for “qualified higher education expenses.”

2. Friends and family members can also contribute to a 529 plan.

3. The account holder can change the beneficiary if the original beneficiary decides not to go to college or does not use all the funds.

4. 529 plan funds can be used at the vast majority of most colleges and universities in the United States.

But there are drawbacks:

1. Plans vary from state to state. And many states allow you to open a 529 Plan in their state without even being a resident in it. This element alone multiplies the time and effort a family has to spend researching the different plans offered by each state. Investment options, sales charges, account fees – all differ between plans. The overload of options and the time spent researching each can be a serious source of stress that causes a family to delay even starting a fund.

2. If money from a 529 plan is withdrawn and not spent on what’s considered a “qualified higher education expense,” it would likely be subjected to income taxes and a penalty tax as high as 10%. We all know that college expenses don’t stop at

room, board and books. Working in such a big gray area of uncertainty is often not worth the risk of paying unexpected taxes on a big ticket item (i.e. car) that is college related to you but not to the guidelines of the 529 plan.

3.  Finally, a 529 plan can reduce your beneficiary’s ability to receive income-based financial aid. If this happens, it can render the savings plan useless since it just increased the total amount of money you’ll pay for higher education.

Whole/Permanent Life Insurance – The True Solution for College Savings

Whole life insurance is hands down the better college savings plan than actual college savings plans.

1. Whole Life allows you to save for any person, business or charity regardless of their relationship to you. You can also choose multiple beneficiaries, dividend up to receive whatever percentage you set for each. This is a far greater area of flexibility compared to college savings plans, which limit your beneficiaries to family members and close friends.

2. Whole Life plans offer unlimited ways to spend your money. Money withdrawn from a college savings plan is only allowed to be spent on pre-qualified college expenses or else be subjected to federal income tax and possibly a 10% federal tax penalty. Last time I checked, college students ate food, buy clothes, put gasoline in their cars, etc. Whole life plans can help pay for this without penalizing the student.

3. Whole Life plans have attractive interest rates, regular dividends and no downside risk. That’s right, zero risk. Whereas many college savings plans are subject to the turbulent stock market. Can you imagine putting money away for years only to find out that what you cash out that what you cash out is less than the amount you put in?
4. Whole Life plans won’t jeopardize a student’s chances of getting additional financials aid. Compared that to money in a college savings fund, which is factored into the financial aid calculator.

5. And most importantly, guaranteed completion. By that, I mean a Whole Life plan has the ability to guarantee that a savings target will self-complete under all circumstances.

It is amazing that this secret has not spread like wildfire. Perhaps that can be attributed to the name – whole life insurance. Few people know that it can do so much more than insuring the loss of loved one – for everything that happens in life from college and retirement. It’s time that the world knows more about the full capacity of whole life insurance.

If you have questions, want to learn more or have comments call 

Iddi Sandaly, CPA at 301-613-5165.