Save Today For Your Child's Tomorrow
Ensuring that their children receive a high-quality education remains one of the top long-term objectives for parents. However, with the continuous and seemingly unending escalation of college costs, affording a superior college education has become increasingly challenging and often requires incurring a substantial amount of debt.
While the 529 College Savings Fund is the most popular approach that parents use to save for their children's college education, Permanent Life Insurance has emerged as a new and viable option. Although it has been in existence since the Civil War, well before the concept of college education was even conceivable for middle-class families, Permanent Life Insurance has recently gained traction as a reliable method of saving for college.
Let's analyze the advantages and disadvantages of both options and determine which is the most appropriate strategy for parents seeking to save for their children's college education.
529 College Savings Plans - The Pros and Cons
529 plans, commonly known as college saving plans, have garnered considerable attention in the last decade, particularly in light of the increasing tuition fees coupled with the stagnant income of the average American. There are several advantages to these plans, such as the fact that earnings can be accumulated tax-deferred and withdrawals can be exempt from federal income tax and state taxes, provided they are used for "qualified higher education expenses."
Additional benefits of a 529 plan include the flexibility for friends and family members to contribute to the plan and the option for the account holder to change the beneficiary in the event that the original beneficiary decides not to attend college or does not utilize all of the funds. Moreover, the funds in a 529 plan can be used at a vast majority of colleges and universities across the United States.
However, there are certain drawbacks associated with 529 plans. These plans vary from state to state, and some states allow non-residents to open a 529 plan in their state. This aspect requires families to invest significant time and effort in researching the various plans offered by each state, including investment options, sales charges, and account fees. The overwhelming number of options and research involved can cause stress and potentially delay the start of a fund.
If funds from a 529 plan are withdrawn and not utilized for a qualified higher education expense, it is subject to income taxes and a penalty tax of up to 10%. The uncertainty of potential tax implications associated with college-related expenses outside of room, board, and books can discourage individuals from using this method to save for college.
Furthermore, a 529 plan may adversely affect the beneficiary's ability to receive income-based financial aid. This outcome can make the savings plan ineffective and increase the total amount of money required to pay for higher education.
Why 529 College Savings Plans Are Losing Their Cool
You’d think that with the ever growing importance of a college education – combined with wildly escalating tuition prices – the popularity and reliance on 529 College Savings Plans would increase as well.
But according to a recent Christian Science Monitor article…
“Assets in 529 college savings plans (which differ from 529 prepaid tuition plans) fell from a record high in the first quarter to $157.5 billion in the second quarter – a 0.5 percent decrease, according to Financial Research Corp. (FRC) in Boston. In the third quarter of 2011, net inflows were negative – more funds flowed out than flowed in – the first time that happened since the middle of the Great Recession. In the first half of this year, net inflows were nearly 7 percent below the same period last year and about 60 percent below The second quarter’s $2.9 billion in net inflows (contributions minus withdrawals) were lower than they were a year earlier, and down nearly half from their pre-recession heyday in the mid-2000s.”
In the mid-2000s, certain financial products enjoyed a period of prosperity that has since waned. Presently, the landscape has shifted considerably, and an increasing number of individuals are recognizing the shortcomings of 529 Plans as a viable investment vehicle. In addition, many are acknowledging the benefits of employing cash value life insurance as a means of college savings.
According to an article, former stock broker Brian Solik is among those who have arrived at this realization. As someone with expertise in the field, he is well aware that the current financial climate is vastly different from that of the mid-2000s. After experiencing the 2008 stock market crash, Solik ceased making contributions to his children's three 529 Plans and instead opted for cash value life insurance.
Solik's reasoning is unsurprising: he prioritized security. While a drop in one's investment portfolio is expected to some extent, the depreciation of one's children's college savings warrants a reevaluation of one's strategy.
Permanent Life Insurance - The TRUE SOLUTION For College Education Savings
Permanent life insurance is hands down the better college savings plan than actual college savings plans. Among permanent life insurance benefits:
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Permanent Life Insurance allows you to save for any person, business or charity regardless of their relation to you. You can also choose multiple beneficiaries, divided 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.
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Permanent Life Insurance 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. Permanent Life Insurance plans can help pay for this without penalizing the student.
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Permanent Life Insurance 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 is less than the amount you put in?
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Permanent Life Insurance plans won’t jeopardize a student’s chances of getting additional financial aid. Compared that to money in a college savings fund, which is factored into the financial aid calculator.
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And most importantly, guaranteed completion. By that, I mean a Permanent Life Insurance plan has the ability to guarantee that a savings target will self-complete under all circumstances.
It’s amazing that this secret hasn’t spread like wildfire. Perhaps that can be attributed to the name – permanent 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 permanent life insurance.
Why is Permanent Life Insurance the better solution? Let's recap the differences:
Flexibility
According to the Internal Revenue Service, money in a 529 college savings plan can only be used for "qualified education expenses" including tuition, fees, books, and room and board at an accredited U.S. school. Should your child opt out of college, choose a foreign or unaccredited school or receive a full scholarship, you can transfer 529 funds to another beneficiary or pull the funds out and pay income tax on the withdrawal. You may also have to back taxes if you've taken state tax deductions over the years as well as a 10 percent penalty on earnings.
"With life insurance, it doesn't matter how you use the cash," says Jim Van Meter, founder and president of The College Planning and Funding Advisor in Reno, Nev. A student can use life insurance savings for college, a down payment on a house, to start a business or for retirement, he says.
Risk
Section 529 college savings plans fluctuate with the market. Whole and universal insurance policies frequently provide guaranteed returns if time is on your side, says Myron Feinberg, a Certified Financial Planner and founder of the College Aid Specialist in Commack, N.Y."In the first two years of a life insurance policy you're getting a minimal of rate of return because (insurance providers) are pulling out the costs," says Feinberg. "After 10 or 12 years, you will see a rate of return of 4 (percent) to 5 percent."
Guaranteed returns can cap your earnings. Should the market generate returns above the fixed rate on your policy, life insurance holders may not earn any additional cash -- whether you can depends on your insurance provider and policy.
"The thing about a permanent life insurance policy is that you want to put as much money in as the government will allow you," says Jim Kuhner, owner and certified college planning specialist at College Selection Strategy in Keller, Texas.
Unlike 529 plans, some life insurance policies use a tiered system when doling out returns. The more you invest, the better your return rate. To maximize earnings, Kuhner advises families to purchase a policy with a low death benefit and to contribute the maximum allowance.
Financial Aid
One of the major advantages to using a cash value policy for college savings is that money in an insurance plan won't reduce your financial aid. Money in a 529 college savings plan can subtract up to 5.6 cents in aid for every dollar stored in the account, but cash value policies are sheltered from the federal financial aid formula, according to the Department of Education.
"If families take money out of a life insurance policy for college, they need to do that as a loan," says Van Meter.
Van Meter also says that taking a loan against a life insurance policy won't count against your financial aid but will reduce your death benefit. Cashing a policy out entirely will count as income and can reduce your aid package by up to 47 percent and could incur surrender charges.
Families with low assets are already protected from losing federal financial aid dollars. According to the Department of Education, families can hold up to $74,000 in assets -- including real estate outside the primary home, stock market investments, savings accounts and college saving vehicles -- without impacting their federal aid. Exactly how much depends on the age of the oldest parent.
Families with low assets are already protected from losing federal financial aid dollars. According to the Department of Education, families can hold up to $74,000 in assets -- including real estate outside the primary home, stock market investments, savings accounts and college saving vehicles -- without impacting their federal aid. Exactly how much depends on the age of the oldest parent.
Cost
Section 529 administrative and advisory costs can range from 0.25 percent to 1.85 percent according to Morningstar, but charges on cash value insurance policies can easily top 2 percent, says Kuhner. To reduce the costs, Kuhner advises families to insure the student rather than listing him or her as the beneficiary.
"The mortality charges are going to be much less," he says, adding that policies for young, healthy kids are substantially cheaper than those for adults.
Besides paying higher administrative and advisory costs, Peter Laurenzo, a Certified Financial Planner and president of College Aid Planning Associates Inc. in Albany, N.Y., says parents saving for college in an insurance policy won't get a state income tax deduction that many 529 holders receive.
"In a New York 529 plan, (families) get a state tax deduction up to $5,000 per parent," he says. "That's significant."
However, not every state offers a 529 deduction and most that do only offer it to residents invested in that state's plan.
Before enrolling in a life insurance or 529 plan, comparison shop and have a financial adviser crunch the numbers to see whether the no-risk returns of a life insurance plan outweigh the costs and lost tax deduction.
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