Even in this age of online education and wild business success stories told by dropouts who are making millions, nothing can beat a good, well-rounded college education. Sadly, nothing can beat the prices of a good, well-rounded college education either. College tuition is rising steeply and there’s no sign the climb will stop. You may be wondering, should I invest in an indexed universal life or a 529 plan to fund my children’s education?
If you’re far from paying off your own student loans, that’s probably the only part of your college experience that you regret. And if you’re a new parent, already you’re probably anxious for the future of your children. It’s no wonder there’s a huge battle to get tuition costs under control and make college more accessible in every way.
A college education does wonders for social mobility. Your chance of getting a good job is way better with a degree than without. The amount of networking you can do with your classmates and professors will help you get ahead. Also, four years at college are amazing for developing soft skills you will need not only in your professional life but in your personal life as well. And you’ve only got a decade and a half to assemble a decent financial plan and put it into motion in order to fund your children’s college education.
It’s no wonder most people purchase life insurance when they become parents – suddenly, having someone completely dependent on you for a great number of years requires some serious planning. A lot of people have a college fund for their children. But, their plan to meet their goal of having enough money saved up by the time their children reach college age may get derailed.
If the primary breadwinner dies a few years after opening that savings account, it will be quite the challenge for the family to keep afloat, let alone save extra money. This is why many people, in addition to having personal savings, invest in term life insurance. Should something happen to one of the parents before all of the children are grown up and earning well, the death benefit should be a financial cushion in those difficult times.
However, at Ogletree Financial Services we are passionate about examining how living benefits earned from permanent life insurance policies, and IULs in particular, can make a family’s life easier. Indexed universal life insurance policies generally hit that sweet spot of being way less risky and more “beginner-friendly” than variable life insurance policies, but you can also earn more with them than with regular universal life or whole life insurance.
Indexed universal life or a 529 plan?
Here we will list the benefits of having an IUL policy in place when you know your child is going to college.
Death benefits – the basic deal. While many consider it morbid to think about your own death, it’s deeply responsible in every way to take a moment and reflect on how your death today could affect your business, your family, or, yes, your child’s college education. Any life insurance policy will help you alleviate your concerns about an unforeseen event halving your family’s income.
Accessing the policy’s cash value through an income tax-free loan or withdrawal – this is a big benefit. The earning potential of your IUL is linked to the performance of a select stock market index over a select period of time, and your credited interest rate will never be negative. So in years that the stock market under-performs or loses value, your indexed universal life policy will not.
You can access this money at any time – a withdrawal will decrease the value of your policy permanently and will be income tax-free if the amount you’re withdrawing is less than the amount of the premiums that you have paid up to that point. You can even access your money through loans which are also non-taxable.
These benefits can be a huge relief, and in general, they might be way better for you than investing in a 529 plan, whether it is a prepaid tuition plan or college savings plan. Either way, 529 plans are limited as to what you can use the money for. Indexed universal life policy cash value can be used any way you see fit. You make the decision, not the IRS rules that govern the 529 plan.
Bankrate.com states that IULs “have fewer restrictions on distributions [than 529 plans] and offer a place for families to shelter funds from the federal financial aid methodology.
Parental stewardship – you, the insured, have full control of the policy, and if your family’s plans change you can use the accumulated cash value in your policy for purposes other than paying for your child’s college education. This flexibility is always welcome because you just never know what can happen in 10 to 20 years. On the other hand, if you have a 529 plan and don’t use the funds in it for higher education purposes, you may face penalties or lose your benefits.
You can re-position the policy for other needs later in life – assuming your child’s college education is paid off, there is probably still money left in the IUL. You can use your policy’s cash value later in life as well. IULs are a popular vehicle for supplementing your income after you retire, and for good reasons.
Term Life Insurance and 529 Plan
Another option is to purchase a term insurance plan, which is going to be much more affordable than a IUL policy. In fact, term insurance plan is going is going to be drastically more affordable. IUL is going to cost three or four times more than a term plan.
Instead of spending the money on higher premiums, take the saved money and put it in a 529 plan. One of the advantages of doing this is you won’t have to pay for additional life insurance you don’t need. With a IUL policy, it’s a permanent form of coverage, which means it’s never going to expire. The problem is, you may not always need life insurance, and you could be paying for expensive premiums for permanent protection you won’t need.
With term insurance policies on the other hand, they are a temporary form of coverage. You purchase them for a certain amount of time, and then the plan expires. You can buy a policy which will match the length of your lengths.
Getting a Cheaper IUL Policy
If you’re going to purchase an IUL plan, you have some choices to make if you wish to keep the monthly premium as low as possible. These choices could possibly save you a significant sum of money over the course of the year.
One of those changes is to cut out tobacco. If you’re a smoker, you should expect to pay drastically higher premiums. Being a tobacco user makes you a high-risk applicant, and the insurance company is going to charge you drastically higher premiums for your plan. If you cut out tobacco, you can trim your rates in half.
Living a healthy lifestyle is another way you can put yourself in better position to get a lower rate. This mainly factors into the medical exam so work on getting your cholesterol and blood pressure down, and the trickle down effect of that will be lower weight which might put you in the preferred rating class!
The final thing to do is shop your rates around. Compare, compare, and compare!
With hundreds of life insurance carriers in the market and thousands of different plan styles it would be wise to find an independent insurance agent or agency that can look at your case thoroughly and make a non-biased recommendation. Here at Ogletree we specialize in fitting you into the best plan that meets all your needs.
IULs won’t be the perfect match for all families in all circumstances. If you want to get an assessment of whether they might be the right fit for you, you can always request a customized quote through the contact form (on the left side of your screen) or get in touch with us at 1-800-712-8519.
Frequently Asked Questions
The benefits of having an IUL policy in place when you know your child is going to college are, the policy’s death benefit, accessing the policy’s cash value through an income tax-free loan or withdrawal, parental stewardship, and you can re-position the policy for other needs later in life.
The answer is no, but instead of spending the money on higher IUL premiums, take the saved money and put it in a 529 plan. One of the advantages of doing this is you won’t have to pay for additional life insurance you don’t need. With a IUL policy, it’s a permanent form of coverage, which means it’s never going to expire. The problem is, you may not always need life insurance, and you could be paying for expensive premiums for permanent protection you won’t need.
Accessing the policy’s cash value through an income tax-free loan or withdrawal – this is a big benefit. The earning potential of your indexed universal life policy is linked to the performance of a select stock market index over a select period of time, and your credited interest rate will never be negative. So in years that the stock market under-performs or loses value, your indexed universal life policy will not.