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Life insurance or 529 for college savings?

 

Where you store your child's college savings could impact his or her ability to attend college almost as much as grades and standardized test scores. Section 529 plans -- the college savings vehicle preferred by many families and financial advisers -- offer federal and sometimes state tax benefits, and subtract far less from a student's financial aid package than money stored in a checking or savings account. But having a robust 529 college savings plan could hurt the student's chances at tapping other sources of financial aid, which has parents starting to examine other options, such as cash value life insurance policies. These policies, for example, don't offer state tax incentives but have fewer restrictions on distributions and offer a place for families to shelter funds from the federal financial aid methodology.

In the battle between 529 college savings plans versus permanent life insurance, here's how both fare.

Round 1: 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.

 

Round 2: 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.


Round 3: 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.

 

Round 4: 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.

 

 

 

COMPARISON CHART: Life Insurance vs. 529 Plan for College Savings

 

 

529 Plan

Permanent Life Insurance

Save for Anyone:

You can save money in a 529 plan for anyone — your child,,grandchild, niece, nephew, friend, or even yourself.

In permanent life insurance plans, you can also save for anyone – your child,,grandchild, niece, nephew, friend, or even yourself. In addition, a permanent life insurance policy offers the ability to save for any person, regardless of their relationship to you, as well as,any company, educational institution, or charity of your choice.

Tax Advantages:

529 plans are funded with after-federal-income-tax dollars. Your money in a 529 plan grows tax- deferred and and withdrawals for qualified higher education expenses are free from federal tax. *note: some states also allow you to take deduction on your state income tax filing for a contributions you’ve made to a 529 plan.

Permanent life insurance plans are funded with after-federal-income tax dollars. Your money grows tax-deferred and withdrawals taken out as policy loans are tax-free as long as the policy remains in force. Permanent life plan cash value earnings also accumulate on a tax-deferred basis and, if managed properly (via withdrawals and/or loans), can be also be withdrawn on a 100 percent tax-free basis.

Contribution limits:

For 2014, this maximum that one person can contribute to a 529 plan is $14,000. The restriction is per beneficiary, per person, so a married couple can contribute $28,000 to a 529 plan per beneficiary without incurring gift tax penalties.Another option for funding a 529 is to front-load the plan with a contribution that covers the next five years. This means that a person can contribute up to $70,000 at once to a single beneficiary ($140,000 for a married couple) without incurring gift taxes, as long as no further gifts are made to the same beneficiary until the sixth year.

Similar to 529 plans, permanent life plans have certain contribution limits, particularly within the first seven years of the policy,. However, most permanent life plan contribution limits can be structured to exceed the limits of a 529 plans, and they are also not limited to the $350,000 lifetime limit of a 529 plan.

Investment Flexibility and Risks:

529 plans are investment-based, providing opportunities to invest in predetermined funds or portfolios.

Permanent life plans do not offer investment-based options and the possible upside return; however, they offer NO downside investment risk. Permanent life insurance plans provide guaranteed cash value and non-guaranteed dividends. For many people,,the peace of mind associated with safety and guarantees are far more attractive, particularly when saving for a specific time frame and/or goal such college savings.

Control:

You as the account owner, rather than the beneficiary of a 529 plan, maintain full control of all account assets and determine the timing and amount of distributions.

You as the account owner, rather than the beneficiary, maintain full control of the permanent life plan cash value and determine the timing and amount of distributions.

Beneficiary options:

You can can change beneficiaries, without penalty, provided the new beneficiary is a member of the previous beneficiary’s family.

You can change permanent life plan beneficiaries without penalty, at any time, and for any reason. In contrast to the family beneficiary restrictions of a 529 plan, a permanent life insurance plan allows you to change the beneficiary to any person, institution and/or charity. You can also have as many beneficiaries to receive whatever percentage you choose as long as the total allocation across all beneficiaries equals 100%.

Financial Aid Impact:

529 plans are included in the calculation of a parent’s assets of expected family contributions as in related to a student applying for federal financial aid for college.

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 Withdrawal 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 withdrawals can be used for any purpose whatsoever and there are no penalties.

Ability to be used for colleges outside of U.S.

529 plan funds can only be withdrawn without penalty for use at accredited colleges by the US Department of Education.

Withdrawals from permanent life insurance plans can be used to help the student to attend a college in the the U.S. or an international college. There are no restrictions.

 

 

 

 

The Gerber Life College Plan vs. 529 Plans: Which one makes the most sense for your family?

Preparing for a child’s future is usually a top parental priority. With the price of a college education continuing to rise, many parents are looking for ways to help pay for their children’s college tuition. What are the options?

Several are available. Finding the option that best suits your family’s needs may seem daunting, as some people find. The early years of your child’s life offer a great opportunity to begin some basic financial planning to help tackle the future cost burden of education.

Two popular vehicles for putting aside money for college are 529 Plans and the Gerber Life College Plan1. To help you decide which one might make the most sense for your family, here’s a summary of their advantages and how they work:

 

What is the Gerber Life College Plan?

 

The Gerber Life College Plan is an individual endowment policy that makes planning for your child’s future easier than ever. It matures in 10 to 20 years (your choice) and has an adult life insurance benefit.

An “endowment policy” is a life insurance contract that pays out a lump sum of money upon the policy’s maturity or upon the death of the insured person (such as a parent). This means that the Gerber Life College Plan provides not only a reliable and secure method for planning for college but also the advantages of an adult life insurance policy. It’s designed to give you peace of mind by knowing that you’re protecting your child, with the added bonus of a solution for helping with college expenses.

 

How the Gerber Life College Plan Works

 

It’s easy to apply for the Gerber Life College Plan. Simply choose a fixed monthly premium that fits your budget. The premium rate locks in, so the monthly payment amount will never increase. Then, decide when you want the policy to mature, between 10 and 20 years.

As long as premiums are paid, the Gerber Life College Plan assures how much money you’ll receive at the time of maturity, from $10,000 to $150,000, according to the benefit amount you select. When the policy matures, you’re free to use the payout money in any way you choose – for college expenses or anything else, whether or not your child decides to go to college.

The Gerber Life College Plan offers stable financial growth, regardless of economic fluctuations.

 

What is a 529 Plan?

 

A 529 Plan, known as a “qualified tuition plan,” is sponsored by states, state agencies, or educational institutions. As notes the Securities and Exchange Commission (SEC), it’s a tax-advantaged savings plan that encourages saving for future college expenses.

Each of the fifty states and the District of Columbia sponsor at least one type of 529 Plan:  college savings plans and/or pre-paid tuition plans.

 

How 529 Plans Work

 

There are distinct differences in the two types of 529 plans:

Pre-paid tuition plan:  in general, allows you to purchase credits for future tuition at participating universities and colleges. In some cases, you can also save for room and board expenses as well. Since they’re sponsored by state governments, most pre-paid tuition plans have residency requirements.

 

College savings plan:  allows you to establish an account for your child, the beneficiary. Typically, you can choose from various investment options, such as bonds, mutual funds, money market funds, or age-based portfolios that automatically shift to more conservative investments as your child approaches college age. It’s important to note that unlike pre-paid tuition plans, college savings plans are not guaranteed by state governments and are not Federally insured.

For any 529 plan, money saved must be used toward college expenses; otherwise, financial penalties could be incurred.

Still have questions about planning-for-college options available to you? For more information, check out our college plan comparison chart to help you weigh various options.

As with any financial matter, consult with Edmond Consulting Group LLC for advice concerning your particular situation.

1Policy Form ICC09-PIE, Policy Form Series PIE-09

529 Plan vs. IUL Child Savings Plan

 

Many parents have heard of 529 plans in their state and believe that it is the best savings option for their child’s college education. While 529 plans work for some, they’re not the safest education savings option available. Index universal life insurance offers a savings plan that has fewer restrictions and can be a safer option for your child’s future.

With 529 accounts, you will likely have to pay taxes on the money you take out. You’ll also have to use the money for educational purposes only, or pay hefty penalties if you’d like to use it for anything else. Some 529 plans also have market risk, which means that you could lose money if the market decreases.

 

Index universal life insurance doesn’t have any of those problems. You will not have to pay taxes on the money that you withdraw from the policy, and the interest that you earn is tax deferred. This savings plan does not have any restrictions on what you can or cannot use the money for; this means that there aren’t penalties for using it for costs other than education, and you can access the cash value whenever you’d like. There is also no market risk. You will gain interest when the market is up, but won’t lose money when the market is down. Most 529 plans can’t offer a savings plan without a ton of restrictions and/or market risk.

 

Choosing the best savings plan for your child’s future is important, and can be a difficult task. Family Protection Center has insurance agents across the country that can help you find the right child savings plan.

 

 

A child savings plan, or index universal life insurance, is a policy that earns interest based on a fixed rate or an interest rate based on an equity or bond index. With this coverage you will earn interest when the market increases, but will not risk anything when the market decreases. The policy also has a living benefit, which you or your child can use at any time, as well as a death benefit to be used when your child passes away.

 

Another benefit to this policy is that the taxes on the interest are deferred until you or your child begin to use the living benefit. No income tax payment is required on the money that is withdrawn from the policy. The premiums and benefits are flexible, so you can get a plan that’s perfect for you and your family.

 

Many people use 529 accounts as a child savings plan, but they don’t realize that there are many restrictions and risks involved with those plans. With a 529, you have to use the money for education purposes only, and you’re penalized if the money is used for anything else. Index universal life plans don’t have any restrictions on what you can use the money for and you can access the cash value whenever you’d like.

 

Some 529 plans are not risk free; you could lose some of your money if the market decreases. Because index universal life does not have any market risk, you won’t have to worry about losing your child’s education funds. Most 529 plans can’t guarantee that you won’t lose any money or that you won’t be penalized.

 

 

529 plans come with many rules and restrictions that include taxes and penalties. Index universal life insurance is a great way to save for your child's future without paying a lot of taxes and restrictions. You can start saving for your child's future today! We'll be happy to help you design a plan that works for your ceverage and budget needs.

 

 

Benefits of using index universal life as a child savings plan include:

 

  • Has both a living and a death benefit.
  • Will gain interest.
  • There is no market risk; you won’t lose money.
  • Cash value is tax-free.
  • Interest is tax deferrable.
  • Benefit and premiums are flexible, not fixed.
  • No restrictions on what you can or cannot use money for.
  • No penalties if used for purposes other than education.

 

 

Sample Case


Peter and Elizabeth are new parents and feel it's important to plan ahead for their son's (currently 3 months old) future. They realize that should something happen to Peter, the primary breadwinner, it will be challenging for Elizabeth to keep up with expenses and help pay for college. The couple meets with their life insurance agent to discuss their need for immediate death benefit protection along with financial protection for their loved ones in the future. While discussing their situation, their agent tells them that life insurance may also be used to help fund their son's education. After a needs-based analysis, the couple plans to pay $500 per month in premiums for the IUL policy with a death benefit amount of $175,000. The couple is pleased with the death benefit protection and the flexibility it provides. The policy projects that they can take net zero cost loans1 of $45,446 for four years beginning in year 18 to help pay for their son's college education.

 

1. Zero Cost Loans are loans charged and credited at the same percentage for a net zero cost. The policy year and amount available vary by product.

 

 

 

 

Contact Erica Edmond at (404) 803-0443 or newbusiness@consultwithedmond.com to receive your complementary illustration customized to your situation. Obviously the cash value will vary depending on the results in the S&P. Based on historical experience if invested in a risky stock market related product. For those who want guarantees, there are options which will return a competitive guaranteed tax free return which is defined by the insurance company each year. You not only get the Death Benefit Family Protection and Living Benefits such as payment for Long-Term Care if needed, but also a tax-free accumulation of cash that can be used for college expenses or anything else that you want cash for.

 

 

To find out more about these benefits and receive a free quote, fill out the form to the right or call today!

 

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