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College Saving Or A Life Insurance: Which Would Be A Better Option?

Jul 6, 2013

Whether your kids are in their schools or doing higher studies, you must have planned for a college saving plan. Most of the people, usually opt for normal life insurance plans, but some are of the opinion that it is wiser to invest in a 529 plan. In fact, the way you save money for your children, is equally important as that of their college grades and test scores. 529 plan is an effective college saving plan which is preferred by many of the parents as well as financial advisers, these days. This plan offers a huge range of tax benefits both federal as well as state ones. It also subtracts a much lesser amount from the student's economical aid package, when compared to the other modes of saving plans.

 But then there are certain disadvantages too of the 529 plan. Those who have opted for this plan already, most likely won't be able to try out other financial plans, which their parents have planned for them or a cash value life insurance policy. These policies, unlike the 529 plan, don't offer state tax incentives. But one positive aspect about them is they pose very less restrictions on the distribution policies. These policies also offer a scope to the families to keep funds from the federal economical support methodology.
Well, there are pros and cons to both of the policies, mentioned above; let's take a look at a comparative study between the two.
·      Flexibility - As per the norms of International Revenue Service, money that is kept under a 529 college savings plan, can only be utilized for qualified education expenses. These include fees, books, tuition, board and room at any accredited U.S. school. If your child opt for an unaccredited or foreign school, opt out to join college or receive a full scholarship, the 529 funds can be transferred to another beneficiary. Or else, you can also pull out the funds and pay income tax on withdrawal. On the other hand, the cash that you get from the life insurance, can be used purposes according to your requirement. A student can use this for college expenses, to start a business, for making the down payment of your home or for retirement.
·      Financial aid - One of the major advantages of the cash value policy for college savings is that the money in the insurance plan, won't decrease the total financial aid that you are supposed to receive. In a 529 college saving plan, the money can be subtracted 5.6 cents in terms of every dollars that is kept in the account. On the other hand, the cash value of the policies are secured from the formula of the federal finance. What actually happens is, taking a credit against your life insurance policy, won't count against any financial aid, but will reduce the death benefit. Cashing out an entire policy will be counted as income and it can even help reduce your aid package up to 47% and could involve surrender charges.

·      Risks involved - When it comes to consider the amount of risk, involved with each process, 529 college saving plans fluctuate rapidly with the changing market conditions. You can also use a relevant life calculator in order to compare the features of both types of policy. 

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