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If you’re looking for a way to pay for your or your child’s college education, you may be interested in 529 plans. A 529 plan can be a great option for those who want to save money for college using a tax-free account that gains returns or those who want to attend an in-state public university at a lower price.
Life insurance can also help provide for your child’s education but probably shouldn’t be used as your main savings tool. However, life insurance can still play a role in your college funding planning. Bankrate’s research may be able to help you decide how to use both 529 plans and life insurance to fund your child’s education.
What is a 529 plan?
A 529 plan is an account that is tax-advantaged, earns returns or interest, and allows account holders to spend the funds on approved educational expenses. There are two different types of 529 plans: savings plans and prepaid tuition plans. Both plans are exempt from state and federal income taxes.
Savings plans are more common than prepaid tuition plans. With a savings plan, the account holder invests in certain mutual funds that they choose. Once they withdraw their savings, they can spend them on approved college and K-12 expenses such as tuition and room and board.
Prepaid tuition plans aren’t available in every state and differ in their offerings. Typically, these plans allow an account holder to purchase credits from participating in-state public universities that agree to lock in the current tuition rate for future use.
What is permanent life insurance?
Permanent life insurance is a type of life insurance that does not expire, meaning that as long as a policyholder pays the premium, the policy is active and the death benefit will be paid out to their beneficiaries regardless of when they die.
These policies include a savings or investment component that builds cash value. The policyholder can borrow money against these savings or withdraw money from the account during their life, although outstanding loans at the time of death and withdrawals will lower the death benefit amount to your beneficiaries.
Whole life insurance
Whole life insurance is one of the most basic types of permanent life insurance. Policies are designed to last your entire life, assuming you continue to pay the premiums. Whole life policies can be a great option for many, but they aren’t as flexible as some other types of coverage.
Universal life insurance
Universal life insurance is another type of permanent life insurance. This type of coverage offers more flexibility than a whole life policy. Although the policies can be complicated, they also allow you to adjust your death benefit and premium if you need to.
Variable life insurance
Variable life insurance is a third type of permanent policy that grows cash value. However, with a variable policy, your cash value is invested, usually in mutual funds. The growth of the cash value depends on the performance of the funds you invest in.
Which is a better investment to pay for college
When it comes to life insurance vs. 529 plans for college savings, a 529 plan is much more likely to be a better option.
529 plans are designed to help families save for college expenses. While they are administered by each state (meaning different regulations and fees may apply), 529 plans can be a good choice to save for a college education. These plans are also an easy way for extended family or other relatives to help their loved ones manage college expenses. Contributions can be made periodically, although that is not required, making 529 plans a good choice if someone wishes to contribute occasionally and not on a specific schedule. Just keep in mind that money from 529 plans can have an impact on the financial aid you or your child is eligible to receive.
Life insurance can be an important part of your overall financial planning, but it isn’t designed to help you save for your or your child’s education. Taking a loan from a permanent life insurance policy will likely lower the death benefit should you die before the loan is repaid. However, life insurance policies can help you leave a financial gift to your family and loved ones upon your passing. Having a life insurance policy in place could help your child pay for college should you pass away and they, as your beneficiary, receive your death benefit amount.
Frequently asked questions
What expenses can I pay for with my 529 savings account?
Generally, you can use the money from your 529 plan for anything related to your education, including tuition, fees, books and supplies, on-campus room and board, computers, software, and some expenses if you live off-campus.
If I take an education loan from my life insurance policy, are there long-term implications?
Yes. Taking a loan from your life insurance policy, no matter what you use the money for, will mean that the potential death benefit is likely reduced until you pay back the loan. Your insurer uses the policy as collateral for the loan, and they will add interest payments to the money that you’ve borrowed.
Why would I purchase life insurance for my child?
Parents may choose to purchase life insurance for their child for countless reasons. Life insurance at an early age may prevent an issue of uninsurability in the future, could help pay for college through the cash value, or — although no one wants to consider the potential death of a child — could help you pay for end-of-life expenses in the event of a tragic accident or illness.
Which is the best life insurance company for my child?
The best life insurance company will vary for every child. Speaking to a licensed insurance agent about your policy needs and requesting life insurance quotes online from a few different providers can help you make your choice.