529 Plans Vs

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529 Plans Vs. Life Insurance for Funding Education

When most people think about college planning, they think 529 plans. Since 1996 when Congress created Section 529 many people have taken advantage of the benefits offered by this program. As of lately people have been discovering a new concept of preparing for college expenses, permanent life insurance policies. We at Asset Acceleration Planning implement a concept known as the velocity of money, an idea that uses the same dollar multiple times over the course of a clients life. Whole Life insurance is a great vehicle for this concept.

First let’s discuss the pros and cons of a traditional 529 plan:

Pros

	- Once the plan is funded (after-tax), the money can grow tax-free and be removed tax-free for qualifying college education expenses.
	- If owned by the parent(s) or grandparent(s), and funded correctly, the plan’s assets (including growth) are out of their estate for estate tax purposes
	- If the plan is owned by the parent(s) or grandparent(s), and if the child or grandchild does not go to college, the money can be used by the owner(s) for other purposes and would act like an IRA (with similar income taxes and penalties).

Cons

	- If the child does not go to college, the growth on the money becomes taxable and subject to potential penalties when withdrawn or otherwise used by the parent(s) or grandparent(s).
	- The money in a 529 plan is subject to loss due to market risk.
	- 529 plans are not “self completing,” should a parent or grandparent die prior to complete funding.
	- 529 plans have funding limits. Funding is limited by the $12,000 annual gift tax exclusion (although they can be super-funded in year one by pouring in the first five years’ worth of gifts all at once, totaling $60,000).

Now you may be wondering why would you compare a permanent life insurance (whole life or universal life) to a 529 plan? There are actually several great reasons to consider this option:

1. Life insurance is “self-completing”. Assuming the owner of the 529 is the major breadwinner in the family (which is typically the case) and he/she dies without fully funding the 529 plan there will be a significant shortfall when the child goes to college. The life insurance policy would pay an income tax-free death benefit to the beneficiary (presumably the surviving spouse) who can use that money for the child’s college education.

2. Cash value in a life policy will not only grow tax-deferred, but can be removed tax-free (within limits) for college expenses, through policy loans or withdrawals.

3. After borrowing from the policy the cash value will still grow for years to come. When the parent is in retirement he/she can access that cash through policy withdrawals and policy loans. A 529 plan does not allow this.

4. Money in a permanent policy is not a countable asset when a child applies for college financial aid.

Permanent life insurance is a great alternative to a 529 plan and seems to cover some of the gaps that 529 plans have. Whole life is typically recommended for young parents or newlyweds looking to start a family, because typically it takes the policy 10-15 years to generate substantial cash value (unless super-funded). The 529 plan may be a more viable option for children up to age 12/13 since it can accrue money quicker due to its stock market component.

Now ultimately every clients decision needs to be made in their best interest, and we cannot say that permanent life policies are a perfect fit for everyone, but as far as that velocity of money idea is concerned, it is a great option to better utilize your dollars. Not only does it provide great tax incentives, savings options and easy accessibility, it provides a DEATH BENEFIT! Which, after all, is the main purpose of the life insurance. For a more clear comparison between the two options look at the chart below.

	529 Plan	Permanent Life Insurance
Tax Advantage	Funded with after-federal-income-tax dollars. Grows tax-deferred and tax-free for qualified tuition expenses.	Funded with after-federal-income tax dollars. Grows tax-deferred and taken out tax-free as policy loans as long as the policy remains in force.
Investment Risk	529 plans are investment-based, providing opportunities to invest in predetermined funds or portfolios. There is no guarantee of return or principal unless it is invested in low- return, fixed-income funds.	Comes with guaranteed cash value and non- guaranteed dividends.
Financial Aid	529 plans are efficient for financial aid purposes, but are included in the calculation of a parent's assets of expected family contributions.	Life insurance values are NOT included in the federal methodology for calculating financial aid, so you will not be penalized for saving for college.
Non-qualified Penalty	If not used for qualified tuition expenses, there is a 10% federal excise penalty over and above any income tax.	There are no such restrictions. Cash value can be used for any purpose whatsoever.
Provides for the death and/or disability of Parent	529 plans do not have any insurance feature, so if the person providing the contribution dies, the plan may be incomplete.	It is a life insurance policy, covering the life of the primary income provider. If waiver of premium rider is added, it will be self-completing in case of total disability as well.
Can be used for colleges outside of U.S.	Only if the college is accredited by the US Department of Education.	No such conditions exist.

Information from this article was obtained through the following:

BeamaLife - http://www.beamalife.com/college-savings

Life Insurance Selling Magazine - http://www.lifeinsuranceselling.com/Issues/2008/5/Pages/College-Funding-Life-Insurance-vs-529-Plans.aspx