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The prospect of saving for a child’s future education can seem like a monumental task. Setting up a 529 plan or whole life insurance account can take some of the stress off your students’ shoulders.
But which option is best for your family? Our guide will help you learn more about the differences, benefits and drawbacks of each of these saving methods. We’ll also introduce you to a few of our favorite life insurance providers.
Life Insurance vs 529 Plans
Every family’s financial situation is unique. Therefore, there is no way to say whether a 529 plan or a life insurance policy is the better option. Some people don’t want to limit the funds that will go to their beneficiary to just educational expenses, while others see their child or grandchild’s education to be their priority. Your wishes for your children and their future interests can help you decide which option is best for your family.
How Does a 529 Plan Work?
A 529 plan is a savings plan specifically designed to make saving money for your child’s education easier by allowing you to invest on a tax-free basis. The money in a 529 plan can be used for college tuition as well as tuition for grades K-12. The plan has an account owner and a beneficiary, just like a life insurance policy. The account owner selects the beneficiary — in some cases, the account owner and the beneficiary are the same person.
529 plans can be invested into through transfers from a bank account or directly from a payroll check. There is no age limit that dictates when a 529 plan can be started. Anyone can contribute to a 529 plan for a child, and select states even contribute to a plan for newborn babies if the plan is opened before the child turns 1 year old.
If the child you set the 529 plan up for decides not to attend college, you can easily transfer the funds to another child or family member or even to yourself to pursue another education. However, if the funds are not used for any type of education, you are subject to a 10% penalty on the earnings at the time of withdrawal.
Life Insurance Options
The 2 main life insurance options are term and whole life insurance. The following is a list of how the major types of life insurance vary.
- Term life insurance: Considered to be the most accessible life insurance option, term life insurance policies last for only a certain amount of time. The time period when your policy is active is referred to as the policy’s term.
- Whole life insurance: This type of policy does not expire and has both a death benefit and a cash value.
- Universal life insurance: Universal life insurance is a type of life insurance policy that lasts for the entirety of your life and has both a cash value and death benefit. You can change the amount of premium and death benefit without opening a new policy.
Most parents who choose to invest in a life insurance policy as a vehicle to help their children pay for college choose a whole or universal life insurance policy because they accumulate a cash value that is tax-deferred like a 529 plan.
When your son or daughter starts college, you can also take a loan out against the cash value of the policy. While this can reduce your beneficiary’s death benefit in the event that it is not paid back, this may not necessarily be a dealbreaker if you intended to use the plan as a college savings fund.
Unlike a 529 plan, there are no limitations on how your children use any disbursements or loans they receive from their insurance company. If your child decides not to attend college, he or she can take a loan out against the value of the policy to start a business or pursue other career endeavors.
529 Plans and Life Insurance Comparison
|What is it?
|Accounts with tax advantages that are used to pay designated education expenses for beneficiaries of any age.
|A contract with an insurer that pays out a sum of money upon the death of the account owner. May also accumulate a cash value.
|Distributions are tax-deferred and not subject to federal income tax
|Distributions do not necessarily need to be used for educational expenses
|Annual tax-free gift limitations
|Up to $75,000 annually for single filers
|Only gifts that have a present value exceeding $15,000 are subject to taxes
|No age limits on beneficiaries
|Investments chosen by a professional portfolio manager
|Account owner controls investments
|Account owner controls fund distribution
|Account owner controls how account funds are distributed upon his or her death.
Prepaid Tuition Plans
Prepaid tuition plans are a type of 529 plan that allow you to prepay future tuition costs today. There are only a certain number of these plans available, and they are largely state-sponsored. This means that you must meet residency requirements to qualify. The earnings in prepaid tuition plans will grow tax-free and will not be taxed when you take money out so long as it’s spent on qualifying educational expenses.
According to CollegeBoard’s Trends in College Pricing and Student Aid, in-state tuition for public 4-year schools increased by 1.1% in 2020. Tuition for private nonprofit 4-year schools increased by 2.1%. Prepaid tuition plans allow you to lock in future tuition at today’s rates. This will end up saving you a ton of money in tuition as long as tuition expenses continue this trend in the future.
Prepaid plans are usually designated to a certain school. However, funds can usually be transferred if the child decides to go to a different school as long as the school of choice chooses to participate.
Benefits of Saving for a College Education
Saving for college tuition early can save your child from the burden of college debt in the future. As the price of college tuition continues to rise, investing rather than simply saving money in a bank account can help you keep up with inflation and rising costs.
If you send your child to college without savings, your child will likely need to take out student loans to fund his or her education. The average federal student loan rate is 4.66% APR, which means that your loan will accumulate about $466 in interest annually for each $10,000 your student needs to borrow. Saving for college doesn’t only help fund tuition — it can also help your student pay for other college expenses, such as textbooks and housing.
Review Your Savings Options
Ultimately, the choice is up to you and depends on your situation. 529 plans fluctuate with the market, whereas whole life insurance guarantees a return. When it comes to putting money into a life insurance policy, you should put in more to get more from it. With 529 plans, you can contribute a small amount whenever you like, which would generate a steady amount over time.
The administrative and advisory costs of 529 plans can be a minimal percentage. 529 plan account holders will get a state income tax deduction that insurance policy owners usually don’t receive.
When it comes to 529 plan regulations, each state has different rules and regulations that dictate plan creation, how expenses can be used and anything the state will contribute to the plan. For life insurance policies, regulations are mainly dependent on the insurance company as well as the account owner because the person who owns the account has more active control over investments and disbursements.
Compare Life Insurance
If you decide that a whole life insurance policy is the best way to save for your child’s education, be sure to leave yourself plenty of time to compare plans. Consider starting your search with a few of our favorite insurance policy providers below.
- securely through Ladder Life Insurance's websiteBest For:Adjustable coverage
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.
- securely through Haven Life Insurance's websiteBest For:Under Age 64
Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Saving for the Future
No matter how you decide to save for your child’s future education, planning early is crucial. As the cost of college tuition continues to climb and collegiate-level education becomes more and more common, staying in school can help your children pursue their passion and stay competitive when they eventually enter the workforce.
Though it might seem early to plan for college when your child is young, a little foresight can save your child from thousands of dollars of debt in the future.
Frequently Asked Questions
Is life insurance a good way to save for college?
A whole life insurance policy can help your child take out a loan against the value of the policy, which can be an easy and effective way to fund a college education.
What happens to my 529 if a child does not go to college?
You can transfer the 529 policy to another beneficiary. You can also cash out the policy with a 10% penalty.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.