College Savings 529 Plans vs Whole Life Insurance

Planning for a child’s or your own college education can often seem overwhelming, with numerous options and decisions to make. Navigating the complexities of financing this significant investment in one’s future demands careful consideration and strategic planning. While the conventional approach often involves financing college through student loans, (which has resulted in a staggering $1.7 trillion in student loan debt in the U.S.!), exploring alternative methods and savings strategies can provide a more financially secure path toward achieving higher education goals.

The Traditional Saving Approach – The 529 Plan

529 Plans have been the staple savings method since 1996, created by the IRS. While 529 Plans offer many benefits for saving for college expenses, there are also some drawbacks to consider:

• Limited investment options: 529 Plans typically have a limited selection of investment options, which may not suit every investor’s preferences or risk tolerance.
• Restricted use of funds: Funds in a 529 Plan must be used for qualified education expenses, such as tuition, books, and room and board. If the funds are used for non-qualified expenses, the earnings portion of the withdrawal will be subject to federal income tax and a 10% penalty. These rules have changed somewhat since 2022, and continue to do so.
• Impact on financial aid: Although 529 Plan assets have a relatively low impact on federal financial aid calculations, they can still reduce the amount of aid a student may be eligible to receive. The impact varies depending on whether the account owner is the parent or another relative.
• Limited flexibility for changing beneficiaries: Although you can change the beneficiary of a 529 Plan, there are restrictions on who can be named as a new beneficiary. The new beneficiary must be a family member of the original beneficiary, as defined by the IRS, to avoid tax penalties.
• Loss of control over assets: The account owner of a 529 Plan retains control over the assets, but some individuals may be concerned about giving up control to the plan administrator when it comes to managing the investments.
• No guarantee on investment returns: The performance of a 529 Plan’s investments is not guaranteed, and the value of the account can fluctuate with market conditions. This could result in lower-than-expected returns, potentially affecting the amount available for college expenses.

Alternatives to the 529 Plan

Prior to the introduction of 529 Plans (and many ways still), some traditional methods for college savings included:^*

• Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts: These custodial accounts allowed parents, grandparents, or other relatives to transfer assets to minors without the need for a legal guardian or trust. Assets in these accounts could be used for any purpose, including college expenses. However, unlike 529 Plans, earnings in UGMA/UTMA accounts are subject to taxes, and the assets may have a larger impact on financial aid eligibility.
• Savings bonds: Families would often purchase U.S. Treasury Savings Bonds (such as Series EE and Series I bonds) as a safe, low-risk investment for college savings. The interest earned on these bonds may be tax-free if used for qualified education expenses, but their low return rates may not keep up with the rising costs of college education.
• Traditional savings accounts or Certificates of Deposit (CDs): Parents would set aside funds in a regular savings account or CDs as a simple method to save for college. However, the interest rates on these accounts are typically lower than other investment options, and the interest earned is taxable.
• Coverdell Education Savings Accounts (ESAs): Previously known as Education IRAs, these accounts allow for tax-free growth and withdrawals for qualified education expenses, including K-12 and higher education costs. However, annual contributions are limited to $2,000 per beneficiary, which may not be sufficient to cover the full cost of college education.
• Whole life insurance policies: Some families utilized the cash value growth in whole life insurance policies as a method to save for college. The cash value can be accessed through loans or withdrawals, generally tax-free, to cover education expenses. However, these policies can be more expensive and may not offer the same level of tax advantages as 529 Plans.
• Regular investment accounts: Parents and grandparents could also invest in stocks, bonds, and mutual funds through a standard brokerage account to save for college expenses. However, these accounts do not offer the same tax advantages as 529 Plans, and the assets may be subject to capital gains tax upon sale.

An out-of-the-box approach for college savings

One creative and little used strategy to build up money for college is properly structured whole life insurance. It has guaranteed cash value growth (not market tied!), tax advantages, flexible access to funds, ZERO impact on financial aid, and so many more benefits.

• Guaranteed cash value growth: Whole life insurance policies have a guaranteed cash value that grows over time, which can provide a stable and reliable savings vehicle for college expenses.
• Tax advantages: The cash value growth in a whole life insurance policy is tax-deferred, meaning that you won’t pay taxes on the gains while the money remains in the policy – ever. When you do access the cash value, you can borrow against the policy instead of a withdrawal – and the IRS does not tax this method.
• Flexible access to funds: You can borrow against the cash value of the policy, without the need to sell investments or liquidate assets, which can be helpful when you need money for college tuition and expenses. Instead of borrowing from a ‘traditional bank’, you’re borrowing from yourself, thus can pay yourself back over time (or set up a payment arrangement for your child to pay it back over time – and keep the money in the family rather than out to a company providing Student Loans). Every penny paid back, is money that can be borrowed back out for something else that will make or save you money.
• Protection for your family: A whole life insurance policy not only provides a savings component but also offers a death benefit to protect your family financially. In the unfortunate event of your passing before your child attends college, the death benefit can be used to cover educational expenses.
• Not included in FAFSA. No impact on financial aid: Unlike some other assets, the cash value of a whole life insurance policy is generally not counted as an asset when determining eligibility for federal financial aid, which can improve your chances of receiving assistance for college expenses.
• Can be used for anything, not just college: The policy owner has control of the policy’s potential accumulated cash value. If plans change, the accumulated cash value can be used for other purposes, such as supplementing your retirement income.
• Forced & long-term savings: A whole life insurance policy requires regular premium payments, which can help instill a disciplined savings approach for college funding. It ensures that you consistently put money away for your child’s education. Whole life insurance policies can be held for decades, allowing you to build significant cash value over time. This can help you prepare for future education expenses, even beyond college, such as graduate school or continuing education.

In conclusion, whole life insurance can be an amazing alternative to 529 Plans for college savings, providing unique benefits that may align better with many families’ financial goals and circumstances. With its guaranteed cash value growth, tax advantages, flexible access to funds, and the added protection of a death benefit, whole life insurance policies can serve as a versatile and reliable savings vehicle. Furthermore, the forced savings aspect instills a disciplined approach, while the minimal impact on financial aid eligibility ensures that additional assistance remains within reach. Ultimately, each family’s financial situation and preferences will dictate the best approach to saving for college, but whole life insurance policies present an attractive option for those seeking a well-rounded and secure strategy.

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*Details change year over year, and laws change. These facts apply through 2021, and may have changed. Please do your due diligence and gather all your facts from various sources before choosing a method and sticking to it.