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529 Plans Versus Life Insurance for College Savings

By May 2, 2018 No Comments

Many parents purchase 529 plans that allow them to save for their children’s’ college education. Life insurance is another savings vehicle for children, so compare both plans as you choose the best option for your child’s future education.

529 Plans

529 Plans are a unique way to save for your child’s college education. The money grows tax-free, and distributions are not subject to federal income tax. You can open an account with a 529 Plan manager or your financial planner. Consider these facts about 529 Plans.

Uses: Spend 529 Plan funds on tuition, books and other college expenses at a qualified school, including vocational schools, colleges and universities. If you withdraw the money for something other than education, you will owe penalties and taxes on the distributions.

Fees: Expect to pay a 529 Plan fee based on your portfolio. Additionally, you may owe a broker fee if you purchase the policy through a financial advisor.

Investment Return: When you invest in 529 Plans, you choose the portfolio in which you invest your funds. There is no limit to your return potential, but you also aren’t guaranteed a return since you invest in mutual funds, bond mutual funds or money market accounts.

Financial Aid: While 529 Plans allow you to pay for college, they do affect your child’s financial aid package. Your child could lose up to 5.64 percent of the 529 Plan’s total value in college financial aid.

Life Insurance

Cash-value or whole life insurance policies accrue cash over time. Buy a policy when your child is born, and it could pay for your child’s college education in 18 years. These policies grow tax-deferred. Understand several facts about using life insurance for college.

Uses: Life insurance is flexible since you can use the accrued money for any expense. Your child can withdraw the funds for college or buy a car or house or vacation if they get a full scholarship or decide not to attend college.

Fees: Expect to pay regular premiums for your life insurance policy. You’ll also owe the insurance agent a commission.

Investment Returns: The type of life insurance policy you buy dictates the returns you receive. On average, you could see a three to six percent return over 10 years.

Financial Aid: Borrow money from your cash-value or whole life insurance policy for school, and you don’t have to claim it as income on your Free Application for Federal Student Aid forms. Overall, it will minimally impact your child’s financial aid eligibility.

When paying for your child’s education, start saving early. If possible, invest in 529 Plans since they’re specifically designed for education.