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 whole 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:
Take income tax-free college loans.* You can use the cash value in your policy to take out loans tax-free to help pay for college expenses (or other uses) without having to worry whether they’re qualified education expenses or not.
Get 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. Timing is everything. Imagine a market downturn occurring right before your student’s freshman year. Whole life provides you with guaranteed premiums, death benefit and cash value that won’t decrease based on financial market performance. Any dividends paid will enhance your cash values and death benefit.
Have options in case of disability. What if you became disabled while trying to build up savings for that college education? With whole life, you have an optional waiver of premium rider to guarantee your college funding stays on track.
Benefit from savings that may not affect financial aid considerations. FAFSA™ financial aid guidelines currently don’t count your life insurance policy’s cash value as an asset, which means you could qualify for a higher level of aid. A 529 plan is considered an asset by FAFSA. Note: some colleges do view life insurance as an asset in determining financial aid.
Fund an education should the unthinkable happen. Unlike a 529 plan, life insurance provides an income tax-free death benefit to your named beneficiary which could fund an education.
Sometimes there are better solutions
There may be situations where whole life insurance won’t work for you. It’s best to use whole life as a college savings option when the child you hope to help send to college is young. That way your policy can build enough cash value to properly cover college expenses. You can use what’s called an optional Additional Paid-Up (API) rider to significantly add to the early build-up of cash values in your policy. But if that first tuition bill is coming up soon, whole life insurance may not be the solution for you.
What role will life insurance play in your plan?
Providing protection to your loved ones is primarily what whole life insurance is known for. But it can play a key role in your college funding plan with tax-preferred access to cash values and additional benefits that provide added flexibility, protection and guarantees without market volatility to you. It can also be a solution that supplements funds alongside your 529 Plan contributions. It doesn’t have to be one or the other when it could be both.
Cosmo Insurance Agency is knowledgeable in various options including but not limited to – term, ROP, permanent and whole - from over two dozen A rated carriers. We are familiar with the rate classifications that particular carriers use to determine the health class of enrollees – and there are significant differences between them. No matter what the results of your medical examination are, we will find the insurer that will provide you will the best rating class and thus the lowest premiums.
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