College costs continue to rise: in 2021, the average student attending an in-state school could expect to pay more than $27,000 in college costs per year, while those attending private schools paid a whopping $54,800.1 Parents of kids heading off to college soon may wonder about the best way to save for these seemingly inevitable costs.
Two popular options include whole life insurance policies and 529 college savings plans, but the paths to paying for a college degree utilizing either of these options can be distinct. Here key distinctions between these options are discussed in terms of saving for and paying for a child's education.
How Whole Life Insurance Can Pay for College
Unlike term life policies, which come into play only when the policyholder dies, whole life insurance includes both an insurance and an investment component. As premiums are paid, the cash value of the policy increases; eventually, policy owners may be able to withdraw part or even all of the policy's value in a cash lump sum.
Because whole life insurance policies for children tend to be inexpensive, parents may consider purchasing a policy in their child's name during childhood, then using these funds to pay for college a decade or two later. And unlike 529 college savings plans, proceeds from a whole life policy can be used to pay for anything, not just room, board, tuition, and fees.
How a 529 College Savings Plan Can Pay for College
A 529 college savings plan is a type of savings or investment account expressly dedicated to paying for higher education expenses—essentially a 401(k) for college. Many states offer tax breaks for 529 contributions, lowering your overall tax bill. Even better, the earnings in a 529 plan grow free from federal tax, and withdrawals will not be taxed as long as they are used to pay for qualified educational expenses like room, board, tuition, and books.2
529 funds are also transferable; if you have multiple children, you can pay for them from a single 529 account as long as you change the listed beneficiary.
Factors to Consider When Paying For College
There is no one-size-fits-all solution to paying for college. The decision to consider whole life, a 529 plan, or both will come down to a few key factors:
- What's your timeline? Will you need to start paying for college in the next few years, or do you have a decade or longer?
- Is your child in good health?
- Is your child likely to receive merit- or need-based scholarships?
- What other sources of college funding are available?
- What is the FAFSA list as my expected family contribution?
The answers to these questions can help you choose a path. You may want to discuss your options with a financial professional to see which option will allow you to minimize taxes and maximize the amount of money available for your child's education.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any insurance product or security. To determine which insurance product(s) or investment(s) may be appropriate for you, consult your financial professional prior to purchasing or investing.
This material is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims-paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by WriterAccess.
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1 How much does college cost?, College Data, https://www.collegedata.com/resources/pay-your-way/whats-the-price-tag-for-a-college-education
2 The top 7 benefits of the 529 plans, 1st Financial Bank USA, https://www.savingforcollege.com/intro-to-529s/name-the-top-7-benefits-of-529-plans