Universal Life Insurance Presents Savings Options for College Education
The cost of a college education is high, and it’s only projected to get higher between now and the day your child heads off to campus. With that in mind, it’s never too early or too late to start putting aside money for your child’s education.
How much to save is a personal choice, but experts today advise having at least a third of a four-year program’s tuition and fees saved up to help your child with education expenses. For a child born in 2023, that means saving a minimum of $300 a month in a plan earning at least 6% interest
For kids who may go to a private college that figure goes up to $600 per month.
For most people looking for college savings options, the 529 plan is a familiar choice. However, there’s another option that, while not a secret, is certainly lesser known.
The underused power of universal life insurance
While life insurance is traditionally viewed as protection against worst-case scenarios, it can also be a strategic tool for educational planning.
A cash value universal life insurance policy does more than just offer a death benefit — it builds cash value over time, which can be accessed to fund a child’s college expenses. Additionally, it accumulates cash value that earns interest, sometimes even linked to a stock market index, which could further enhance its earning potential.
The growth of this cash value is tax-deferred while the interest rate potential is capped. These policies also typically include a guarantee that the rate won’t drop below zero percent, even when the market dips.
When your child begins college, income-tax-free loans can be taken out from this cash value to cover tuition and other education-related expenses.
Moreover, depending on how the cash value has grown, it could also be used later by your child for significant life events, like putting a down payment on a first home or even supplementing retirement income. To avoid taxes on these withdrawals, the policy must stay active.
Comparing with 529 plans
A 529 plan is another robust educational savings tool. It’s an investment account specifically designed to fund educational expenses, offering tax benefits for qualified spending, which includes college and precollege tuition, apprenticeships, trade programs and even student loan repayments.
The benefits extend to tax deductions on contributions and deferral on investment growth in many states.
If the initial beneficiary doesn’t use the funds, they can be transferred to another beneficiary. However, withdrawals not used for education are subject to taxes and possible penalties.
Making the choice
With various plans available that fit most any budget and family situation, saving for college is an achievable goal. When establishing a savings plan that’s right for your family, consider such factors as age, college goals and risk tolerance.
It’s easy to feel overwhelmed by the options. To find a plan that’s right for your family, get guidance from a financial advisor. It could be the most important step you take towards securing an educational fund for your child.
“How much should you be saving for your child’s college education?” Trina Paul, Dec. 6, 2023. cnbc.com/select/how-much-should-you-be-saving-for-your-childs-college-education/#:~:text=Kantrowitz%20recommends%20the%20one%2Dthird,one%2Dthird%20from%20student%20loans.
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