Financial
You’ve probably heard of a 529 plan when it comes to saving for your child’s college education. It’s the most recognizable vehicle for college savings because of its favorable tax treatment for qualified education expenses, as well as a state tax deduction in some states. But it’s not the only option available to you.
A permanent life insurance policy can help you accomplish your college savings goals the same way a 529 plan can. But there are differences between the two that might make whole life insurance a more suitable option for you.
Income tax-free loans
Guarantees without market volatility
A 529 plan likely has funds tied to market returns. While that can allow your college fund to grow over time, a down market could significantly affect what you can afford when you have a need for the funds.
Timing is everything. Imagine a market downturn occurring right before your student’s freshman year.
Certain permanent life insurance policies offer you protection from market downturns. Whole life insurance provides you with guaranteed premiums, death benefit and cash value that won’t decrease based on financial market performance. Any dividends paid can be used to enhance your policy’s cash values and death benefit if used to additional paid-up insurance (known as paid-up additions).
Certain universal life insurance policies also provide protection against market downturns with a declared interest rate that builds cash value in the policy. Unlike whole life insurance, universal life insurance gives you the opportunity to stay flexible with adjustable premiums.
Options in case of disability
What if you became disabled while trying to build up savings for that college education? In the event of total disability of the insured, the optional Waiver of Premium for Total Disability rider credits a premium to the policy so that your plan for college funding stays on track.
Financial aid considerations
FAFSA® financial aid guidelines don’t currently count the cash value of life insurance policies as an asset, which means you could qualify for a higher level of aid. A 529 plan is considered an asset by FAFSA®. However, it is important to note that some colleges do view life insurance as an asset in determining financial aid.
Should the unthinkable happen
Unlike a 529 plan, life insurance provides an income tax-free death benefit to your named beneficiary which can be used to fund an education.
Sometimes there are better solutions
There may be situations where permanent life insurance won’t work for you – such as if that first tuition bill is coming up soon. It is best to purchase cash value life insurance as a college savings option when your child is young. This gives your policy time to build enough cash value to help fund college expenses. Adding an optional paid-up additions rider can significantly add to the early build-up of cash values in your policy.
Talk to your financial professional to see if using permanent life insurance is a college savings is a solution for you.
| Permanent life insurance | 529 plan | |
|---|---|---|
| Potential deductible contributions | No | Via state tax in some states |
| Tax-free access to cash | Via policy loan as long as the policy stays in force | If for qualified education expense |
| Not subject to market risk | Yes2 | No |
| Optional disability waiver rider | Yes | No |
| May affect financial aid amount | No | Yes3 |
| Death benefit | Yes | No |
1 If tax-free loans are taken and the policy lapses, a taxable event may occur. Loans and withdrawals, if taken, will reduce the death benefit. Withdrawals (partial surrenders) and loans from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the withdrawal or loan is taken and, if taken prior to age 59½, a 10% federal tax penalty may apply. Always consult with a tax advisor regarding your particular situation. Optional riders may be purchased for an additional cost.
2 When utilizing whole life insurance and current assumption universal life insurance policies.
3 Applicable if owned by parents. 529 plans owned by grandparents/third parties generally do not affect financial aid or beneficiaries under current guidelines.
This material provides general information that is designed to be educational in nature and is not intended as specific tax or legal advice to any particular individual nor the law of any particular state. Please seek the advice of a qualified tax or legal professional for your specific situation.
FAFSA® is a registered trademark of the U.S. Department of Education.
Products are issued by and guarantees based on the claims-paying ability AuguStar Life Insurance Company and AuguStar Life Assurance Corporation. Product, product features and rider availability vary by state. Issuer not licensed to conduct business in NY.
