Using life insurance and 529 plans to save for college
March 6, 2019

It’s no secret that college is expensive and growing more so every year. Whether a private or public institution, the costs are significant. According to the College Board, in 2017-2018, the average annual tuition and fees for a private institution was $34,740. A public school is somewhat less, where the yearly cost is $9,970, for in-state students, and $25,620, for out-of-staters.

Regardless of where a student eventually decides to attend college, long-term financial planning is key to fending off enormous amounts of student loan debt.  Some families are choosing state-run, tax-advantaged 529 plans, which are similar to Roth IRAs, but geared toward higher education expenses, rather than retirement.  Available in all 50 states, contributions to 529 plans are tax-deferred while they are invested and you won’t have to pay tax when you begin to withdraw the funds as long as you use them for qualified, education-related expenses, such as tuition, books and room and board. To learn more about the various tax regulations regarding 529 plans, the IRS offers information on its website.

While 529 plans are quite popular as a vehicle for saving for your children’s education, there are other options as well. Permanent life insurance, unlike term policies, has a tax-deferred component that can be of benefit as a savings tool, according to financial planners.

If given time, the policy’s cash value can grow and parents can draw on those funds, tax-free, provided the money is used for tuition and other education-related expenses. Investment-wise, experts say, whole life insurance is the safest strategy. The insurance company guarantees a certain return, which can increase if the investments do well. Typically, a policy holder can expect a 3 percent to 6 percent return after several years.

When it’s time for your child to attend school, the policyholder can borrow against the cash balance. The death benefit is reduced by the insurer, if the loan is not repaid. That’s not necessarily a negative, say some insurance experts, if the policy was essentially established as a college savings plan.

And, while insurance policies are not considered in financial aid calculations and 529 plans are counted as a parental asset, it’s difficult to argue a life insurance policy is the better way to save for your children’s education.

Consider this:  Fifty percent or more of the first year of a life insurance policy’s premiums goes to the agent’s commission. It can take at least 10 years for the cash value to surpass what you paid in premiums and most permanent policies charge more than 2 percent per year for various fees. By comparison, the average 529 plan sold directly to the client, has an expense ratio of about .05 percent, according to the research firm Morningstar.

If you would like to learn more about the various options available to you as savings vehicles for your children’s college education, please contact your tax advisor at Diamond & Associates today. We are here to help!


Recent Posts

Budget Tips For The Holidays

Budget Tips For The Holidays

The holidays are a time of joy and togetherness, especially for our beloved families in Newtown, PA. Yet, they can also bring financial stress if not managed wisely. In this blog post, we’ll explore some expert budgeting tips to ensure your family’s festive season is filled with merriment, not money stress.

Tax Breaks: The Silver Lining to Investment Losses

Tax Breaks: The Silver Lining to Investment Losses

In the world of finance, it’s not uncommon to encounter investment losses at one point or another. While these situations can be disheartening, there’s a silver lining worth exploring, especially for our neighbors in Newtown, PA – tax breaks. In this blog post, we’ll delve into the art of turning investment setbacks into opportunities for tax savings.

2024 Health Savings Plan Changes: Should You Restrategize Your Plan?

2024 Health Savings Plan Changes: Should You Restrategize Your Plan?

Many wish they had learned about taxes in school. While we are certainly fans of education, especially around accounting, tax regulations change so frequently! Much of what you have learned has probably changed multiple times since you were a student.

For example, the Health Savings Plan has some new big changes you may want to consider.


Reach out for a consultation.

Diamond & Associates CPAs