College Savings Options: 529 Plan & Index Universal Life Insurance

Published on
December 13, 2022
Ayshe Tayfun

The burning question on every parent’s mind is who is going to pay for college and how? Most Americans (66% of graduates) end up borrowing an average of $26,900 – $31,450 to attend public and private universities, according to data collected from 2016-2019. American student loan debt totals nearly $1.75 trillion, and is a burden shared by about 46 million borrowers. So, how do parents plan ahead to try to reduce the mounting college debt that most Americans spend decades paying off? We will explore two college savings options to prepare your child for college and beyond.

Benefits of a 529

529 plans are a traditional and popular type of college savings account. The funds must be used for education or they are subject to taxation and fines. Funds in a 529 plan cannot exceed $520,000.

  • Tax-free growth
  • Tax-free income
  • “Set it and forget it”
  • Can be used to cover education in any state
  • Can be used to cover room and board in addition to tuition costs
  • Can also be used to cover apprenticeship programs
  • It is possible to change the recipient if they don’t attend college or receive an apprenticeship.

While laws vary from state to state, you may receive tax benefits with a 529 plan. For example, in New York State, “you may be able to deduct up to $5,000 ($10,000 if you’re married filing jointly) of your Direct Plan contributions when you file your state income taxes.” Check with your accountant or research the 529 tax laws in your state to see what tax benefits may apply to you.

Benefits of index universal life

When you think about a college fund, life insurance may not be your first thought but an Index Universal Life Insurance (IUL) policy can be a great way to save for college. IULs can be used to pay for college by borrowing against the cash value of the policy or by withdrawing a portion of the cash value.

IUL offers greater flexibility than a 529. Index Universal funds may be used for anything. There are no penalties for accessing the funds inside the policy for non-educational expenses. Additionally, it provides permanent life insurance and other living benefits including long-term care coverage. The funds in your IUL will not be factored in when colleges consider your assets to determine financial aid eligibility.

Features of an IUL include:

  • Tax-free growth
  • Tax-free income
  • Tax-free death benefit
  • Tax-free long term care benefits
  • Participate in up to double digit market returns, with 0% downside risk
  • Locked in gains that “reset”
  • Liquidity: Up to 90% of the cash surrender value, at any time for any reason, tax and penalty free
  • No early withdrawal penalties
  • No IRS contribution limits
  • Flexible contributions

If you are a business owner, you can hire your child for a lifetime of tax-free benefits. For example, if you hire your child part-time at $12/hour ($6,350 a year), you can deduct that amount as a salary expense, and deposit it into an IUL. Your child can then use those funds to pay for their education and other life expenses. This allows you to provide for your child’s future needs, from education, to buying their first home, and beyond.

Which is right for you?

529 College Savings Plans and Index Universal Life Insurance are both great ways to ensure that your children are able to cover the costs of their future education. While 529 plans have long been the traditional college savings method, an IUL policy provides greater flexibility and lifelong living benefits. Contact MAT Health & Financial Solutions to learn more about Index Universal Life insurance as a college savings alternative.

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