August 28, 2014
If you are like most parents who desire for your children to attend college, you’re probably worried about the rising costs. Per an article by Newsweek, since 1969, the average cost of college (tuition, fees, and room and board for full-time students) has almost doubled compared with the median family income. According to the National Center for Education Statistics, the average cost for college in 1969 was $9,502 (after adjusting for inflation), and it jumped to an average cost of $19,339 in 2012. If you take in account, that the median income for a typical American family is $51,000 on average, then you can see that the cost of college for just one child will eat up 40% of the family’s income. Without advance college savings, coupled with possible grants and scholarships a student may receive from financial aid and other sources, many parents’ dream of sending their child to college might not be fulfilled. When deciding on what vehicle is best for you to use as a college savings plan for your child, it’s best that you get all of the facts so that you can make an informed decision.
We’re providing a chart below so that you can compare the features and benefits of using a life insurance policy for college savings versus a state-sponsored 529 plan. Both options are excellent vehicles to help save for your child’s future college education and we hope that chart will serve as a valuable guide to determining if a permanent life policy is the best choice to you. There are various types of permanent life insurance: Whole Life, Universal Life, Index Universal Life, Variable Whole life, and Variable Universal Life. One of our financial advisors on the Largo Financial Services team will be able to help you with implementing a college savings plan that best fits your family’s needs to reach your goals, and help you to understand all of the types of permanent life insurance.
|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.
|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.
|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.
|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.
|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.
It is also important to project what the future costs of college will be for your child(ren). Schedule a FREE College Cost & Savings Plan Analysis. A Largo Financial Services advisor will meet with you and help you determine how much college will cost, review your college savings options with you, and develop a plan to help you reach your goals.