Life insurance or 529 for education savings?
If you’re looking for a way to pay for your or your child’s college education, 529 plans might be of interest to you. 529 plans can be a great option for those who want to save money for college by using a tax-free account that generates returns or for those who want to attend a state public university for a lower price. .
Life insurance can also help with your child’s education, but probably shouldn’t be used as a primary savings tool. However, life insurance can still play a role in funding your college. Bankrate’s research can help you decide how to use both 529 plans and life insurance to fund your child’s education.
What is a 529 plan?
A 529 plan is a tax-advantaged account, which generates returns or interest and allows account holders to spend the funds on approved educational expenses. There are two types of 529 plans: savings plans and prepaid tuition plans. Both plans are exempt from state and federal income taxes.
Savings plans are more common than prepaid tuition plans. With a savings plan, the account holder invests in certain mutual funds that he chooses. Once they have withdrawn their savings, they can spend them on approved expenses for college and Kindergarten to Grade 12, such as tuition, room and board.
Prepaid tuition plans are not available in all states and differ in their offerings. Typically, these plans allow an account holder to purchase credits from participating public universities in the state that agree to lock in the current tuition rate for future use. Keep in mind that these plans do not cover room and board.
What is permanent life insurance?
Permanent life insurance is a type of life insurance that does not expire, which means that as long as an insured pays the premium, the policy is active and the death benefit will be paid to its beneficiaries regardless of the time of their death.
These policies include a savings or investment component that creates cash value. The policyholder can borrow money from this savings or withdraw money from the account during their lifetime, although loans outstanding at the time of death and withdrawals will reduce the amount of the death benefit.
Whole life insurance
Whole life insurance is one of the most basic types of permanent life insurance. The policies are designed to last a lifetime, assuming you continue to pay the premiums. Whole life insurance policies can be a great option for many, but they’re not as flexible as other types of coverage.
Universal life insurance
Universal life insurance is another type of permanent life insurance. This type of coverage offers more flexibility than a whole life insurance policy. While policies can be complicated, they also allow you to adjust your death benefit and premium if you need to.
Variable life insurance
Variable life insurance is a third type of permanent policy that increases cash value. However, with a variable policy, your cash value is invested, usually in mutual funds. The growth of the redemption value depends on the performance of the fund in which you invest.
What is a better investment to pay for college
When it comes to life insurance compared to 529 plans for education savings, a 529 plan is much more likely to be a better option.
529 plans are designed to help families save for college expenses. While administered by each state (meaning different regulations and fees may apply), 529 plans may be a good choice to save for a college education. These plans are also an easy way for extended family or other family members to help loved ones manage their college expenses. Contributions can be made periodically, although this is not mandatory, making 529 plans a good choice if someone wants to contribute occasionally and not on a specific schedule. Just keep in mind that money from 529 plans can impact the financial assistance you or your child is entitled to.
Life insurance can be an important part of your overall financial planning, but it’s not designed to help you save for your or your child’s education. If you die before the loan is paid off, taking out a loan from a permanent life insurance policy will likely reduce the death benefit. However, life insurance policies can help you leave a financial gift for your family and loved ones. Having a life insurance policy in place could help your child pay for their college education if you die and, as a beneficiary, they will receive your death benefit amount.
Frequently Asked Questions
What expenses can I pay with my 529 savings account?
Typically, you can use the money from your 529 plan for anything related to your education, including tuition, fees, books and supplies, on-campus room and meals, computers, software and some expenses if you live off campus.
If I take out a student loan against my life insurance policy, are there any long-term implications?
Yes. If you take out a loan on your life insurance policy, no matter how you use it, the potential death benefit will likely go down until you pay off the loan. Your insurer uses the policy as collateral for the loan, and will add interest payments to the money you borrow.
Why buy life insurance for my child?
Parents can choose to purchase life insurance for their child for countless reasons. Life insurance at a young age can avoid a problem of uninsurability in the future, could help pay for college education through cash value, or – although no one wants to consider the potential death of a child. – could help you pay for the end of the year. living expenses in the event of a tragic accident or illness.
What is the best life insurance company for my child?
The best life insurance company will vary for each child. Talking to a licensed insurance agent about your policy needs and requesting life insurance quotes online from different providers can help you make up your mind.