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~ The Battle Between 529 College Savings Plans vs an EIUL ~
Where you store your child’s college savings could impact his or her ability to attend college almost as much as grades and standardized test scores. Section 529 plans — the college savings vehicle preferred by many families and financial advisers — offer federal and sometimes state tax benefits, and subtract far less from a student’s financial aid package than money stored in a checking or savings account. But having a robust 529 college savings plan could hurt the student’s chances at tapping other sources of financial aid, which has parents starting to examine other options, such as cash value life insurance policies. These policies, for example, don’t offer state tax incentives but have fewer restrictions on distributions and offer a place for families to shelter funds from the federal financial aid methodology.
In the battle between 529 college savings plans versus permanent life insurance, here’s how both fare.
Round 1: Flexibility
According to the Internal Revenue Service, money in a 529 college savings plan can only be used for “qualified education expenses” including tuition, fees, books, and room and board at an accredited U.S. school. Should your child opt out of college, choose a foreign or unaccredited school or receive a full scholarship, you can transfer 529 funds to another beneficiary or pull the funds out and pay income tax on the withdrawal. You may also have to back taxes if you’ve taken state tax deductions over the years as well as a 10 percent penalty on earnings.
“With life insurance, it doesn’t matter how you use the cash,” says Jim Van Meter, founder and president of The College Planning and Funding Advisor in Reno, Nev. A student can use life insurance savings for college, a down payment on a house, to start a business or for retirement, he says.
Round 2: Risk
Section 529 college savings plans fluctuate with the market. Whole and universal insurance policies frequently provide guaranteed returns if time is on your side, says Myron Feinberg, a Certified Financial Planner and founder of the College Aid Specialist in Commack, N.Y.
“In the first two years of a life insurance policy you’re getting a minimal of rate of return because (insurance providers) are pulling out the costs,” says Feinberg. “After 10 or 12 years, you will see a rate of return of 4 (percent) to 5 percent.”
Guaranteed returns can cap your earnings. Should the market generate returns above the fixed rate on your policy, life insurance holders may not earn any additional cash — whether you can depends on your insurance provider and policy.
“The thing about a permanent life insurance policy is that you want to put as much money in as the government will allow you,” says Jim Kuhner, owner and certified college planning specialist at College Selection Strategy in Keller, Texas.
Unlike 529 plans, some life insurance policies use a tiered system when doling out returns. The more you invest, the better your return rate. To maximize earnings, Kuhner advises families to purchase a policy with a low death benefit and to contribute the maximum allowance.
Round 3: Financial aid
One of the major advantages to using a cash value policy for college savings is that money in an insurance plan won’t reduce your financial aid. Money in a 529 college savings plan can subtract up to 5.6 cents in aid for every dollar stored in the account, but cash value policies are sheltered from the federal financial aid formula, according to the Department of Education.
“If families take money out of a life insurance policy for college, they need to do that as a loan,” says Van Meter.
Van Meter also says that taking a loan against a life insurance policy won’t count against your financial aid but will reduce your death benefit. Cashing a policy out entirely will count as income and can reduce your aid package by up to 47 percent and could incur surrender charges.
Families with low assets are already protected from losing federal financial aid dollars. According to the Department of Education, families can hold up to $74,000 in assets — including real estate outside the primary home, stock market investments, savings accounts and college saving vehicles — without impacting their federal aid. Exactly how much depends on the age of the oldest parent.
Round 4: Cost
Section 529 administrative and advisory costs can range from 0.25 percent to 1.85 percent according to Morningstar, but charges on cash value insurance policies can easily top 2 percent, says Kuhner. To reduce the costs, Kuhner advises families to insure the student rather than listing him or her as the beneficiary.
“The mortality charges are going to be much less,” he says, adding that policies for young, healthy kids are substantially cheaper than those for adults.
Besides paying higher administrative and advisory costs, Peter Laurenzo, a Certified Financial Planner and president of College Aid Planning Associates Inc. in Albany, N.Y., says parents saving for college in an insurance policy won’t get a state income tax deduction that many 529 holders receive.
“In a New York 529 plan, (families) get a state tax deduction up to $5,000 per parent,” he says. “That’s significant.”
However, not every state offers a 529 deduction and most that do only offer it to residents invested in that state’s plan.
Before enrolling in a life insurance or 529 plan, comparison shop and have a financial adviser crunch the numbers to see whether the no-risk returns of a life insurance plan outweigh the costs and lost tax deduction.
In the News
Fees that May Cost Your Child’s Education
How it Works
Paying for College the Smart Way
Compare 529 vs Eiul
Make Your Own Choice
Indexed Products and How They Work
The 3 Main Factors Behind IUL Crediting:
The three main factors that make the indexed crediting inside an Indexed Universal Life policy so unique and powerful are as follows:
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S&P Index Fact #1:
The market has experienced annual gains more than three times as often as it sustained annual losses. Put another way, the S&P Index has gone up annually 76% of the time in the last 80 years. I’m referring specifically to a 80-year study period from 1937-2016 where the S&P Index has experienced 61 up-years and only 19 down-years.**
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S&P Index Fact #2:
Those up-years in the S&P were 3x as likely to give you double-digit crediting than single-digit crediting. If we look at those 61 distinct positive years referenced above, the market gained more than 10% in 47 of those years and less than 9% (but greater than 0%) in the other 14 years.**
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S&P Index Fact #3:
Fact #3: there were only two instances where the market had three consecutive negative years during that entire 81-year time period. The S&P Index had three losing years in a row from 1939-1941 and not again until 2000-2002.
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S&P Index Fact #4:
Fact #4: there was only one other instance where the S&P Index even had two consecutive negative years from 1973-1974.*
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S&P Index Fact #5:
- Fact #5Fact #5: What’s interesting is that all three of these time periods were immediately followed up by a rebound year that produced at least a double-digit advance from the new lower starting value. Although your investment portfolio may not have gotten even after this first bounce, there’s a good chance that your IUL’s cash value may pull way ahead after that first double-digit rebound (since it only paid policy charges during the consecutive 0% years).
- ** Click here to see the 80-year study on the S&P Index.
Ever heard the term “fail fast?” That’s what the stock market seems to do. When it has a significant correction, it plummets quickly. Whereas when the market rallies, it is usually a steady ascent over a prolonged period of time. One of my favorite sayings about the market is that “Stocks tend to take the stairs up, but they take the window down.”
2 Questions for You
- Do you believe that the stock market will continue to have corrections and recessions, but still produce more up-years than down-years over the next 30-60 years of your life?
- Do you believe that the majority of those up-years will continue to produce gains in excess of 10% (even if they happen to follow some harsh down-years)?
If you answered yes, then how is the unique crediting methodology of IUL a bad thing? Where else can you confidently channel the volatility of the stock market in this manner?
Questions You Should Ask Yourself
- What better way is there to protect my account value, lock-in the lion’s share of my past gains, while still staying confidently invested without worrying about when the next crash will happen?
- Other than hiding money under my bed while waiting for a crash, how can I truly take advantage of the great buying opportunities that economic corrections provide? How else can I do this when all of the investment strategies available are in some way exposed to major market’s losses?
- What portion of my assets would I be willing to forgo any upside above 11%-13% annual crediting so that I can completely erase the possibility of downside market risk?
CHOOSE SYMMETRY FOR and Eiul or Personal Pension Program?
At Symmetry Financial Group, we understand that everyone has different needs for insurance coverage, including final expense coverage. That’s why we don’t offer “cookie cutter” solutions. We will work with you to learn more about your needs and goals for insurance protection. Then, we’ll find solutions that meet those needs.
We don’t push proprietary products on our clients – we are truly an independent organization, representing multiple insurance carriers. That means you can be confident that your insurance coverage is in your best interest, not ours.
Advanced Explanations of an Eiul or PPP
Now that you have a basic understanding of how Indexed Crediting works, let’s dissect the common crediting criticisms and see if they indeed have any validity. This way you can understand the real pros or cons of IUL’s cost structure and see how you feel about using Indexed Universal Life for your retirement and pre-retirement wealth-building goals.