Is a 529 Plan the best choice for university savings?

Is a 529 Plan the best choice for university savings?

July 06, 2021
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A 529 Plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code. As attractive as 529 plans appear to be, only 3 percent of Americans use this method of accumulating money for college. The average American finds the plans to be overly complex, risky and expensive.

529 Plan vs Life Insurance for College Savings

If you search the internet to compare life insurance vs. 529 plans for college savings, and in particular permanent life insurance, you’ll find polarizing viewpoints. Half of the resources love permanent life insurance as a vehicle to save for college, and provide compelling arguments. The other half suggest that permanent life insurance is not ideal for the purpose of college savings and point to the 529 plan as the natural choice.

 Typical Debate 529 Plan vs Life Insurance Proponents

So which is it:  what is the best vehicle to save for college tuition?

In this article we’d like to share an overview of the current climate of college savings and also provide some advantages and disadvantages of both Life Insurance vs 529 plans.

 But before we get ahead of ourselves, let’s ask the basic question – is saving for college necessary?

Is Saving for College Necessary?

A recent survey of 1000 hiring managers stated that less than 40% of university graduates were prepared for their jobs. This information, along with the staggering increases in college tuition, have caused many in America to question if college is worth it. In addition, the recent growth of the Gig Economy (one-time contract jobs or “gigs”) suggests that many people are doing something about it. Source

For many the high cost of college, and the increasingly poor ROI (return on investment) turn them away from expensive colleges. Those with the option to go to an Ivy League school, or with a desire for a specialized profession (doctor, engineer, etc.) have a greater reason to pay the high cost. But for most Americans, expensive college degrees are no longer considered the help that they once were.

But when you’re a parent, and you don’t know what your child will eventually want to do, your best option is to prepare for a variety of outcomes. This is one of the reasons we like permanent life insurance for college savings, because the cash value can be used for just about anything. We’ll talk more about this later.

Dispelling One Myth: Permanent life is much more expensive

Before we begin, we wanted to dispel one myth. Or at least address one criticism - straight away.

The biggest criticism of permanent life insurance is that it is expensive. This is like a Mercedes-Benz car salesman sitting across the street from the BMW dealership and stating that BMW’s are too pricey.

It’s true that BMW makes some expensive model cars. But it’s also true that they make a model that is less than $30,000 brand new. It’s all about your choice and options.

The same is true of permanent life insurance. You can choose to buy a policy with a large death benefit, and you’ll have a large premium.

 However, if your goal is to save for college with life insurance – you should choose a policy that is meant for cash value growth. We recommend a low death benefit (lower cost) and maximum cash value.  This translates to low fees and accelerated cash value growth. This type of policy won’t be understood by probably 90% of the agents in the business, so you’ll need to contact an Income for Life specialist.

Also, note that fees on life insurance are paid in the beginning, and drop over time, while mutual fund fees are paid throughout the life of the investment – and grow with it.  Would you rather pay fees on the acorn, or the oak tree?  There are studies that state the average equity mutual fund fee structure is 1.28 percent annually; however, many are charging more than 9 percent. 

Blanket statements about Permanent Life costs are not helpful and may be misleading.

Advantages of Permanent Life Insurance for College Savings

  1. Guarantees

 Permanent Life insurance, also known as a Private Reserve Account (PRA), is structured so part of your premium pays for the insurance, and part goes to a separate cash value account.

With a properly structured policy (a PRA), you will never lose money, and your money will grow with an index driven by market performance

So, with a properly designed permanent life policy, you will know how much money you will have available to pay for college when you need it – and if the policy performs better than expected, you could even have more!  Either way, there will be no nasty surprises, and once dividends have been credited to your policy each year, you will never lose them to the whims of the market.

  1. Tax-Advantaged

 These life insurance for college savings plans are funded with after tax dollars and are therefore able to grow tax deferred. You are always able to withdraw your basis (the money you put in) without paying tax, because you already paid it.

But this is really just the starting point. Most people choose to use policy loans to borrow against their cash value using a wash loan – or in some cases gaining via arbitrage. In other words, they can use their cash value as collateral for a loan, and the interest they are charged is equal to the amount they are credited – so it’s like getting a 0% rate.

  1. Few Contribution Limits

 There are limits on how much cash value you can have, but they relate to the amount of insurance you have, and the timing of the contributions. However, with respect to saving for college, the limits are well in excess of any ivy-league college costs.

Contribution limits typically come up when parents are trying to catch up late in the life of their future college student.  It’s important to start early, and think long-term.

  1. Hidden to Financial Aid

Life insurance cash values are not considered when applying for financial aid.

So, even if you have over $100,000 in cash value, it won’t be seen by those considering your child’s financial aid eligibility, such as the FAFSA program. You don’t list any cash value in a life insurance policy on a FAFSA application. That is a BIG deal.

You see, this is of tremendous value when it comes to applying for financial aid, because there are so many options available to families looking for financial aid. And normally, if you have $100,000 in a bank account, a 529 Plan, stock accounts, mutual funds, etc., that money will count against your child’s financial aid eligibility.

You can all but rule out grants such as Pell, FSEOG, and TEACH grants. Also, it might interfere with Merit and Athletic scholarships, Work-study programs and military grants and scholarships as well.

  1. International College Funding

This may not be something you’ve considered, but for the purpose of the comparison with the 529 plan vs life insurance it should be mentioned.

 Life insurance cash value can be used to fund college expenses anywhere in the world. There are no limits to where your child’s college or university can be located.

  1. Flexibility

Ultimately, the money inside a permanent life cash value policy can be used for whatever you want and whenever you want, with very few restrictions.

  • There are no early withdrawal penalties.
  • There aren’t any distribution guidelines.
  • And you won’t have to worry about qualifying expenses.

Essentially, the cash value is all your money and you can do with it as you choose.

Disadvantages of Permanent Life Insurance for College Savings

  1. You must Qualify

A Permanent Life insurance policy is insurance on the life of the insured. As such, the insured is required to qualify for life insurance by taking a medical exam (in most cases) or by answering a questionnaire. In addition there is an element of life insurance that is being purchased, so there are expenses to begin with. But then again you are getting a guaranteed death benefit as well.

For those with significant health risks, the life insurance college savings plan may be more costly than needed. If you’re in excellent shape and have few health risks, you may find that the permanent life insurance costs are well worth it.  You also can insure anyone in which you have an ‘insurable interest’ – a child, spouse, other family member, or business partner.  You still can be the owner, and control the beneficiaries.

  1. Additional Cost

As mentioned earlier, the permanent life college savings plan is a cash value account AND a life insurance policy. The two together make up the PRA.

The cost of the insurance can be more than the cost of a 529 plan, depending on your choices. But keep in mind that you are getting life insurance along with your college savings account, an additional benefit.

Critics of permanent life will state that in the first few years it’s difficult to save because of the up-front administrative costs. Consider two facts in this regard:

  1. Remember that 'max funding' will fly in the face of that argument. With this strategy, you can quickly start using life insurance to save for college expenses. And also note that the longer you have to save, the more time your cash value has to grow.
  2. Permanent life expenses are paid up-front, and diminish over time, whereas mutual fund expenses are paid annually, and actually grow dramatically over time, as they are calculated as a percentage of the account value (see Case Study below for specific numbers).

In contrast, the 529 plan is no longer of value once the beneficiary is out of college. In fact, with the penalty and fees and ordinary income tax rate, the 529 plan may very well turn into a liability. I know of several that have turned out this way, unfortunately. 

Advantages of 529 Plan for College Savings

  1. Tax-Advantaged

Both life insurance and 529 plans are tax-deferred, meaning they are paid for with after tax dollars and grow tax deferred. This means that you don’t get a tax bill each year even though your account is growing and you are “earning” money each year. The money you contribute each year is after tax, and the money that is earned as interest is not considered earned income as long as it stays in the account.

 In addition, there may be some state income tax benefit to investing in this type of account. Depending on your income tax bracket and your contributions. If you contribute $10,000 in one year and the income tax for the state is 5%, you will save $500 on your taxes that year because of the contribution. 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, for example. 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 lost tax deduction.

  1. Growth Potential

When you choose a 529 plan you are essentially choosing mutual funds. These various funds are all invested in a broad variety of market options. With these options comes the opportunity for good investment gain when the markets are performing well.

 Just like any other market investment, when the market is performing well, everyone seems to be happy and the results end up being in line with our expectations. The longer you have to invest and prepare the riskier you can be with your choices. If you don’t have a long time, you’re better off choosing safer investment options like bonds or CDs, with their attendant low returns.

  1. Popular / Variety of Options

As with most stock market investment options since the 1980’s, the 529 plan is a popular choice for some. This means that you have a lot of options and can usually find people that are knowledgeable to help. The 529 plan is not something new, having been created by Congress in 1996.

You can choose to invest in State-sponsored 529 plans, or you can go with your typical financial company sponsored plan. The main difference between the two is that you will likely have more options and variety with the financial company plans, but you’ll pay more. State-sponsored plans typically have lower fees. And financial companies can charge anywhere from 1.5% or more on the account.

Disadvantages of 529 Plan for College Savings

  1. Qualified Expenses Only

The reason the IRS allows this plan to be tax deferred is because they expect these funds to be paid to United States education institutions. As a result, they require that all expenses be directed in this manner.

 This means that there are some things that are not approved to be purchased with 529 plan funds, and it’s up to you to make sure that it’s spent properly. For example:

  • Rent off-campus is allowed, but only up to the limit of the individual school room and board allowance.
  • Books are covered, but non-required study guides are not.
  • Food is allowed, but only for limits up to the individual school room and board allowances.

Keep your receipts – you’re dealing with the IRS.

  1. More Risk 

As with any investment that is in the market, there are risks associated with attempting to get the higher gains. For those with a longer investment window, meaning college is farther off, this risk may not be a major issue. But, as anyone who experienced the markets in 2008 can tell you - one bad year can destroy a decade of steady gains.

529 plans offer options, and some of those are labeled “aggressive growth” for a reason – they are risky. As with all plans that offer significant upside gains, you will be required to accept the downside risk.

  1. Penalties

If you fail to use the funds in a 529 plan for qualified educational expenses, you will incur a 10% excise tax penalty AND associated income tax on gains.

 For example, let’s say you withdraw $20,000 for the year because you expect the associated college expenses to be that amount. If the expenses only end up being $16,000, you’ll pay a 10% penalty ($400) on the $4,000 that was not used for qualified expenses, and you’ll be charged income tax on it as well. If you’re in a 25% tax bracket, you’ll pay a total of $1400 because you failed to use all the money on qualified expenses.

But that isn’t the worst of it…

 Under the rules governing the CSS profile for financial aid, which is applicable to private universities, OR the more popular FAFSA, which applies to state universities, there is a PENALTY imposed against OTHER AVAILABLE FINANCIAL AID which is currently 5.24% of the aid amount.

You ARE reading this right. This means that your diligent efforts to save for college in a 529 plan are penalized rather than rewarded.

However, the reality is that the penalty is much greater than 5.24% because you’re dealing with limited resources and human influencers when it comes to the financial aid process.

When a financial aid representative finds that you have any amount in a 529 plan (again, a required disclosure), one practice of someone working in financial aid is to allocate financial resources elsewhere.

So, you might say that utilizing a 529 plan for college funding results in a penalty that may be as high as 100%.

  1.  U.S. Colleges Only

 Finally, it’s important to note that the IRS is not going to give you money to spend overseas. The 529 plan only considers U.S. Colleges to be qualified institutions of learning. If for some reason your son or daughter chooses to study overseas, the 529 plan will need to be transferred to some other family member. 

  1. Will the Child Even Attend College?

As noted above, the ROI of a university degree is coming increasingly into question.  The ‘Gig Economy, the Internet, and a rapidly-changing economic environment are all changing the view of traditional education.  If the child doesn’t attend, the beneficiary must be changed to someone else in the family; this may be problematic.

Conclusion

As you can see, there are a variety of things to consider when you are thinking about saving for college. We feel strongly that a properly structured  cash value life insurance policy is the best savings tool for college, small business, real estate investment, or pretty much any other self-funded endeavor.

Ultimately, any final decisions should be based upon your specific goals and circumstances.


Comparison Chart

 

 

529 PLAN

PERMANENT LIFE INSURANCE

Save for Anyone:

You can save money in a 529 plan for anyone — your child,,grandchild, niece, nephew, friend, or even yourself.

In permanent life insurance plans, you can also save for anyone – your child,,grandchild, niece, nephew, friend, or even yourself. In addition, a permanent life insurance policy offers the ability to save for any person, regardless of their relationship to you, as well as, any company, educational institution, or charity of your choice.

Tax Advantages:

529 plans are funded with after-federal-income-tax dollars. Your money in a 529 plan grows tax- deferred and and withdrawals for qualified higher education expenses are free from federal tax. *note: some states also allow you to take deduction on your state income tax filing for a contributions you’ve made to a 529 plan.

Permanent life insurance plans are funded with after-federal-income tax dollars. Your money grows tax-deferred and withdrawals taken out as policy loans are tax-free as long as the policy remains in force. Permanent life plan cash value earnings also accumulate on a tax-deferred basis and, if managed properly (via withdrawals and/or loans), can be also be withdrawn on a 100 percent tax-free basis.

Contribution limits:

For 2018, this maximum that one person can contribute to a 529 plan is $15,000. The restriction is per beneficiary, per person, so a married couple can contribute $30,000 to a 529 plan per beneficiary without incurring gift tax penalties. Another option for funding a 529 is to front-load the plan with a contribution that covers the next five years. This means that a person can contribute up to $70,000 at once to a single beneficiary ($140,000 for a married couple) without incurring gift taxes, as long as no further gifts are made to the same beneficiary until the sixth year.

Similar to 529 plans, permanent life plans have certain contribution limits, particularly within the first seven years of the policy,. However, most permanent life plan contribution limits can be structured to exceed the limits of a 529 plans, and they are also not limited to the $350,000 lifetime limit of a 529 plan.

Investment Flexibility and Risks:

529 plans are investment-based, providing opportunities to invest in predetermined funds or portfolios.

Permanent life plans do not offer investment-based options and the possible upside return; however, they offer NO downside investment risk. Permanent life insurance plans provide guaranteed cash value and non-guaranteed dividends. For many people, the peace of mind associated with safety and guarantees are far more attractive, particularly when saving for a specific time frame and/or goal such college savings.

Control:

You as the account owner, rather than the beneficiary of a 529 plan, maintain full control of all account assets and determine the timing and amount of distributions.

You as the account owner, rather than the beneficiary, maintain full control of the permanent life plan cash value and determine the timing and amount of distributions.

Beneficiary options:

You can can change beneficiaries, without penalty, provided the new beneficiary is a member of the previous beneficiary’s family.

You can change permanent life plan beneficiaries without penalty, at any time, and for any reason. In contrast to the family beneficiary restrictions of a 529 plan, a permanent life insurance plan allows you to change the beneficiary to any person, institution and/or charity. You can also have as many beneficiaries to receive whatever percentage you choose as long as the total allocation across all beneficiaries equals 100%.

Financial Aid Impact:

529 plans are included in the calculation of a parent’s assets of expected family contributions as in related to a student applying for federal financial aid for college.

Life insurance values are NOT included in the federal methodology for calculating financial aid, so you will not be penalized for saving for college.

Non-qualified Withdrawal Penalty:

If not used for qualified tuition expenses, there is a 10% federal excise penalty over and above any income tax.

There are no such restrictions. Cash value withdrawals can be used for any purpose whatsoever and there are no penalties.

Ability to be used for colleges outside of U.S.

529 plan funds can only be withdrawn without penalty for use at accredited colleges by the US Department of Education.

Withdrawals from permanent life insurance plans can be used to help the student to attend a college in the the U.S. or an international college. There are no restrictions.

 

Case Study

Mr. Kudagi has a 3-year-old daughter, and wants to ensure she will be able to attend university when she’s 18.  He is interested in a 529 Plan, but is open-minded and will consider Permanent Life Insurance, if it may be a better alternative.  Let’s look at the numbers.

Below is a typical Mutual Fund account, in which the 529 is invested.  We assume a flat 5%/year (no volatility, no stock market losses, and a conservative 2% fee).

Mutual Account 

 

 

Age

BOY Balance

 

Annual

Deposits

 

Annual

WthDrwls

 

Annual

RePmts

 

Annual

Int. Rate

 

Annual

Interest

 

Annual

Tax

Mgt. Fees

EOY Balance

3

 

(20,000)

 

 

5.00 %

1,000

(174)

(420)

20,406

4

20,406

(20,000)

 

 

5.00 %

2,020

(352)

(849)

41,226

5

41,226

(20,000)

 

 

5.00 %

3,061

(533)

(1,286)

62,469

6

62,469

(20,000)

 

 

5.00 %

4,123

(717)

(1,732)

84,143

7

84,143

(20,000)

 

 

5.00 %

5,207

(906)

(2,187)

106,257

8

106,257

(20,000)

 

 

5.00 %

6,313

(1,098)

(2,651)

128,820

9

128,820

(20,000)

 

 

5.00 %

7,441

(1,295)

(3,125)

151,841

10

151,841

(20,000)

 

 

5.00 %

8,592

(1,495)

(3,609)

175,330

11

175,330

(20,000)

 

 

5.00 %

9,766

(1,699)

(4,102)

199,295

12

199,295

(20,000)

 

 

5.00 %

10,965

(1,908)

(4,605)

223,747

13

223,747

(20,000)

 

 

5.00 %

12,187

(2,121)

(5,119)

248,695

14

248,695

(20,000)

 

 

5.00 %

13,435

(2,338)

(5,643)

274,149

15

274,149

(20,000)

 

 

5.00 %

14,707

(2,559)

(6,177)

300,121

16

300,121

(20,000)

 

 

5.00 %

16,006

(2,785)

(6,723)

326,619

17

326,619

(20,000)

 

 

5.00 %

17,331

(3,016)

(7,279)

353,655

18

353,655

(20,000)

(85,000)

 

5.00 %

14,433

(2,511)

(6,062)

294,515

19

294,515

(20,000)

(85,000)

 

5.00 %

11,476

(1,997)

(4,820)

234,174

20

234,174

(20,000)

(85,000)

 

5.00 %

8,459

(1,472)

(3,553)

172,608

21

172,608

(20,000)

(85,000)

 

5.00 %

5,380

(936)

(2,260)

109,793

22

109,793

 

 

 

5.00 %

5,490

(955)

(2,306)

112,022

23

112,022

 

 

 

5.00 %

5,601

(975)

(2,352)

114,296

24

114,296

 

 

 

5.00 %

5,715

(994)

(2,400)

116,616

25

116,616

 

 

 

5.00 %

5,831

(1,015)

(2,449)

118,983

26

118,983

 

 

 

5.00 %

5,949

(1,035)

(2,499)

121,399

27

121,399

 

 

 

5.00 %

6,070

(1,056)

(2,549)

123,863

28

123,863

 

 

 

5.00 %

6,193

(1,078)

(2,601)

126,377

29

126,377

 

 

 

5.00 %

6,319

(1,099)

(2,654)

128,943

30

128,943

 

 

 

5.00 %

6,447

(1,122)

(2,708)

131,560

31

131,560

 

 

 

5.00 %

6,578

(1,145)

(2,763)

134,231

32

134,231

 

 

 

5.00 %

6,712

(1,168)

(2,819)

136,956

33

136,956

 

 

 

5.00 %

6,848

(1,192)

(2,876)

139,736

34

139,736

 

 

 

5.00 %

6,987

(1,216)

(2,934)

142,573

35

142,573

 

 

 

5.00 %

7,129

(1,240)

(2,994)

145,467

36

145,467

 

 

 

5.00 %

7,273

(1,266)

(3,055)

148,420

37

148,420

 

 

 

5.00 %

7,421

(1,291)

(3,117)

151,433

38

151,433

 

 

 

5.00 %

7,572

(1,317)

(3,180)

154,507

39

154,507

 

 

 

5.00 %

7,725

(1,344)

(3,245)

157,643

40

157,643

 

 

 

5.00 %

7,882

(1,371)

(3,311)

160,844

41

160,844

 

 

 

5.00 %

8,042

(1,399)

(3,378)

164,109

42

164,109

 

 

 

5.00 %

8,205

(1,428)

(3,446)

167,440

43

167,440

 

 

 

5.00 %

8,372

(1,457)

(3,516)

170,839

44

170,839

 

 

 

5.00 %

8,542

(1,486)

(3,588)

174,307

45

174,307

 

 

 

5.00 %

8,715

(1,516)

(3,660)

177,846

46

177,846

 

 

 

5.00 %

8,892

(1,547)

(3,735)

181,456

47

181,456

 

 

 

5.00 %

9,073

(1,579)

(3,811)

185,140

48

185,140

 

 

 

5.00 %

9,257

(1,611)

(3,888)

188,898

49

188,898

 

 

 

5.00 %

9,445

(1,643)

(3,967)

192,732

50

192,732

 

 

 

5.00 %

9,637

(1,677)

(4,047)

196,645

51

196,645

 

 

 

5.00 %

9,832

(1,711)

(4,130)

200,637

52

200,637

 

 

 

5.00 %

10,032

(1,746)

(4,213)

204,710


 

 

Age

BOY Balance

 

Annual

Deposits

 

Annual

WthDrwls

 

Annual

RePmts

 

Annual

Int. Rate

 

Annual

Interest

 

Annual

Tax

Mgt. Fees

EOY Balance

53

204,710

 

 

 

5.00 %

10,235

(1,781)

(4,299)

208,865

54

208,865

 

 

 

5.00 %

10,443

(1,817)

(4,386)

213,105

55

213,105

 

 

 

5.00 %

10,655

(1,854)

(4,475)

217,431

56

217,431

 

 

 

5.00 %

10,872

(1,892)

(4,566)

221,845

57

221,845

 

 

 

5.00 %

11,092

(1,930)

(4,659)

226,349

58

226,349

 

 

 

5.00 %

11,317

(1,969)

(4,753)

230,944

59

230,944

 

 

 

5.00 %

11,547

(2,009)

(4,850)

235,632

60

235,632

 

 

 

5.00 %

11,782

(2,050)

(4,948)

240,415

61

240,415

 

 

 

5.00 %

12,021

(2,092)

(5,049)

245,295

62

245,295

 

 

 

5.00 %

12,265

(2,134)

(5,151)

250,275

63

250,275

 

 

 

5.00 %

12,514

(2,177)

(5,256)

255,356

64

255,356

 

 

 

5.00 %

12,768

(2,222)

(5,362)

260,539

65

260,539

 

 

 

5.00 %

13,027

(2,267)

(5,471)

265,828

TOT

260,539

(380,000)

(340,000)

 

5.00 %

556,227

(96,784)

(233,615)

265,828


The key is to look long-term.  Every money decision we make affects us financially as long as we live.

In the above, for example, we see the fees and taxes decimate the value of the fund.

Below is the actual illustration of the Permanent Life Insurance plan from the Insurance Company.  The

Values are guaranteed (CV=Cash Value, and DB=Death Benefit).  We pay into this plan exactly the same way.

Permanent Life Insurance

Age      Premium      Ann.  Loan     Loan Int.     Loan Pmt         Net CV            Net DB

3

20,000

 

 

 

8,265

3,926,483

4

20,000

 

 

 

16,961

4,058,704

5

20,000

 

 

 

37,395

4,208,102

6

20,000

 

 

 

59,066

4,356,049

7

20,000

 

 

 

81,809

4,504,462

8

20,000

 

 

 

105,785

4,652,067

9

20,000

 

 

 

130,966

4,797,371

10

20,000

 

 

 

157,308

4,941,037

11

20,000

 

 

 

184,975

5,083,622

12

20,000

 

 

 

213,926

5,225,780

13

20,000

 

 

 

244,176

5,366,848

14

20,000

 

 

 

275,803

5,506,484

15

20,000

 

 

 

308,806

5,643,796

16

20,000

 

 

 

343,096

5,779,019

17

20,000

 

 

 

281,437

4,953,119

18

20,000

(85,000)

 

 

216,202

4,152,299

19

20,000

(85,000)

 

 

148,227

3,779,234

20

20,000

(85,000)

 

 

77,565

3,698,530

21

20,000

(85,000)

 

 

93,369

3,742,352

22

 

 

 

 

97,704

805,075

23

 

 

 

 

102,291

813,319

24

 

 

 

 

107,137

821,982

25

 

 

 

 

112,265

831,165

26

 

 

 

 

117,677

840,671

27

 

 

 

 

123,404

850,711

28

 

 

 

 

129,439

861,150

29

 

 

 

 

135,817

872,022

30

 

 

 

 

142,564

883,298

31

 

 

 

 

149,674

895,019

32

 

 

 

 

157,186

907,172

33

 

 

 

 

165,100

919,724

34

 

 

 

 

173,455

932,757

35

 

 

 

 

182,238

946,251

36

 

 

 

 

191,517

960,225

37

 

 

 

 

201,288

974,619

38

 

 

 

 

211,567

989,323

39

 

 

 

 

222,408

1,004,462

40

 

 

 

 

233,825

1,019,957

41

 

 

 

 

245,864

1,035,914

42

 

 

 

 

258,546

1,052,325

43

 

 

 

 

271,910

1,069,250

44

 

 

 

 

286,020

1,086,825

45

 

 

 

 

300,877

1,104,986

46

 

 

 

 

316,543

1,123,809

47

 

 

 

 

333,054

1,143,375

48

 

 

 

 

350,435

1,163,695

49

 

 

 

 

368,752

1,184,860

50

 

 

 

 

388,014

1,206,849

51

 

 

 

 

408,305

1,229,724

52

 

 

 

 

429,647

1,253,566

53

 

 

 

 

452,106

1,278,365

54

 

 

 

 

475,715

1,304,151

55

 

 

 

 

500,535

1,330,928

56

 

 

 

 

526,632

1,358,841

57

 

 

 

 

554,085

1,387,920

58

 

 

 

 

582,940

1,418,172

59

 

 

 

 

613,276

1,449,551

60

 

 

 

 

645,173

1,482,066

61

 

 

 

 

678,696

1,515,724

62

 

 

 

 

713,911

1,550,532

63

 

 

 

 

750,882

1,586,482

64

 

 

 

 

789,702

1,623,599

65

 

 

 

 

830,439

1,661,941

TOT

380,000

(340,000)

 

 

830,439

1,661,941


Alternate Account Value  VS. PRA Cash Value

Now, let us compare the 529 vs. Life Insurance accounts side-by-side.  We clearly see here the differences.

In the college years, the 529 Mutual Fund comes out ahead.  But, let's look at this longer-term. 

Even by age 26, the PRA is ahead.  One reason for this is that the money in the insurance cash value

continues to grow within the account, even though the owner has borrowed against it.

And, of course, the 529 has no death benefit 

 

 

 

Annual

 

Annual

 

 

Alternate

 

 

Perm. Life Ins.

 

 

P.L.I. Cash Value

Age

Years

Deposit

Withdrawal

 

Account

 

Cash Value

 

─ Alternate Acct

3

1

(20,000)

 

 

20,406

 

8,265

 

(12,141)

4

2

(20,000)

 

 

41,226

 

16,961

 

(24,265)

5

3

(20,000)

 

 

62,469

 

37,395

 

(25,074)

6

4

(20,000)

 

 

84,143

 

59,066

 

(25,077)

7

5

(20,000)

 

 

106,257

 

81,809

 

(24,448)

8

6

(20,000)

 

 

128,820

 

105,785

 

(23,035)

9

7

(20,000)

 

 

151,841

 

130,966

 

(20,875)

10

8

(20,000)

 

 

175,330

 

157,308

 

(18,022)

11

9

(20,000)

 

 

199,295

 

184,975

 

(14,320)

12

10

(20,000)

 

 

223,747

 

213,926

 

(9,821)

13

11

(20,000)

 

 

248,695

 

244,176

 

(4,519)

14

12

(20,000)

 

 

274,149

 

275,803

 

1,654

15

13

(20,000)

 

 

300,121

 

308,806

 

8,685

16

14

(20,000)

 

 

326,619

 

343,096

 

16,477

17

15

(20,000)

 

 

353,655

 

281,437

 

(72,218)

18

16

(20,000)

(85,000)

 

294,515

 

216,202

 

(78,313)

19

17

(20,000)

(85,000)

 

234,174

 

148,227

 

(85,947)

20

18

(20,000)

(85,000)

 

172,608

 

77,565

 

(95,043)

21

19

(20,000)

(85,000)

 

109,793

 

93,369

 

(16,424)

22

20

 

 

 

112,022

 

97,704

 

(14,318)

23

21

 

 

 

114,296

 

102,291

 

(12,005)

24

22

 

 

 

116,616

 

107,137

 

(9,479)

25

23

 

 

 

118,983

 

112,265

 

(6,718)

26

24

 

 

 

121,399

 

117,677

 

(3,722)

27

25

 

 

 

123,863

 

123,404

 

(459)

28

26

 

 

 

126,377

 

129,439

 

3,062

29

27

 

 

 

128,943

 

135,817

 

6,874

30

28

 

 

 

131,560

 

142,564

 

11,004

31

29

 

 

 

134,231

 

149,674

 

15,443

32

30

 

 

 

136,956

 

157,186

 

20,230

33

31

 

 

 

139,736

 

165,100

 

25,364

34

32

 

 

 

142,573

 

173,455

 

30,882

35

33

 

 

 

145,467

 

182,238

 

36,771

36

34

 

 

 

148,420

 

191,517

 

43,097

37

35

 

 

 

151,433

 

201,288

 

49,855

38

36

 

 

 

154,507

 

211,567

 

57,060

39

37

 

 

 

157,643

 

222,408

 

64,765

40

38

 

 

 

160,844

 

233,825

 

72,981

41

39

 

 

 

164,109

 

245,864

 

81,755

42

40

 

 

 

167,440

 

258,546

 

91,106

43

41

 

 

 

170,839

 

271,910

 

101,071

44

42

 

 

 

174,307

 

286,020

 

111,713

45

43

 

 

 

177,846

 

300,877

 

123,031

46

44

 

 

 

181,456

 

316,543

 

135,087

47

45

 

 

 

185,140

 

333,054

 

147,914

48

46

 

 

 

188,898

 

350,435

 

161,537

49

47

 

 

 

192,732

 

368,752

 

176,020

50

48

 

 

 

196,645

 

388,014

 

191,369

51

49

 

 

 

200,637

 

408,305

 

207,668

52

50

 

 

 

204,710

 

429,647

 

224,937

53

51

 

 

 

208,865

 

452,106

 

243,241

54

52

 

 

 

213,105

 

475,715

 

262,610

55

53

 

 

 

217,431

 

500,535

 

283,104

56

54

 

 

 

221,845

 

526,632

 

304,787

57

55

 

 

 

226,349

 

554,085

 

327,736

58

56

 

 

 

230,944

 

582,940

 

351,996

59

57

 

 

 

235,632

 

613,276

 

377,644

60

58

 

 

 

240,415

 

645,173

 

404,758

61

59

 

 

 

245,295

 

678,696

 

433,401

62

60

 

 

 

250,275

 

713,911

 

463,636

63

61

 

 

 

255,356

 

750,882

 

495,526

64

62

 

 

 

260,539

 

789,702

 

529,163

65

63

 

 

 

265,828

 

830,439

 

564,611

TOTALS

(380,000)

(340,000)

 

265,828

 

830,439

 

564,611


We see here the effects of management fees and taxes on the Mutual Fund have decimated the

account - so that the PRA has $564K more cash value!

The Mutual Fund Annual ROR required on to match Life Insurance Cash Value is 7.24%.  With NO losses... 

Key Points:

-Money within a Permanent Life Insurance policy grows even though one takes a loan against the policy, whereas one draws

 down the Mutual Fund, reducing the money which can grow in the future.

-Think long-term with your money

-Be aware of the effects of taxes and fees.

Alternate Account Death Benefit VS. P.L.I.Death Benefit 

 

 

 

Annual

 

Annual

 

 

Alternate

 

 

Perm. Life Ins.

 

 

P.L.I. Death Ben.

Age

Years

Deposit

Withdrawal

 

Account

 

Death Benefit

 

─ Alternate Acct.

3

1

(20,000)

 

 

20,406

 

3,926,483

 

3,906,077

4

2

(20,000)

 

 

41,226

 

4,058,704

 

4,017,478

5

3

(20,000)

 

 

62,469

 

4,208,102

 

4,145,633

6

4

(20,000)

 

 

84,143

 

4,356,049

 

4,271,906

7

5

(20,000)

 

 

106,257

 

4,504,462

 

4,398,205

8

6

(20,000)

 

 

128,820

 

4,652,067

 

4,523,247

9

7

(20,000)

 

 

151,841

 

4,797,371

 

4,645,530

10

8

(20,000)

 

 

175,330

 

4,941,037

 

4,765,707

11

9

(20,000)

 

 

199,295

 

5,083,622

 

4,884,327

12

10

(20,000)

 

 

223,747

 

5,225,780

 

5,002,033

13

11

(20,000)

 

 

248,695

 

5,366,848

 

5,118,153

14

12

(20,000)

 

 

274,149

 

5,506,484

 

5,232,335

15

13

(20,000)

 

 

300,121

 

5,643,796

 

5,343,675

16

14

(20,000)

 

 

326,619

 

5,779,019

 

5,452,400

17

15

(20,000)

 

 

353,655

 

4,953,119

 

4,599,464

18

16

(20,000)

(85,000)

 

294,515

 

4,152,299

 

3,857,784

19

17

(20,000)

(85,000)

 

234,174

 

3,779,234

 

3,545,060

20

18

(20,000)

(85,000)

 

172,608

 

3,698,530

 

3,525,922

21

19

(20,000)

(85,000)

 

109,793

 

3,742,352

 

3,632,559

22

20

 

 

 

112,022

 

805,075

 

693,053

23

21

 

 

 

114,296

 

813,319

 

699,023

24

22

 

 

 

116,616

 

821,982

 

705,366

25

23

 

 

 

118,983

 

831,165

 

712,182

26

24

 

 

 

121,399

 

840,671

 

719,272

27

25

 

 

 

123,863

 

850,711

 

726,848

28

26

 

 

 

126,377

 

861,150

 

734,773

29

27

 

 

 

128,943

 

872,022

 

743,079

30

28

 

 

 

131,560

 

883,298

 

751,738

31

29

 

 

 

134,231

 

895,019

 

760,788

32

30

 

 

 

136,956

 

907,172

 

770,216

33

31

 

 

 

139,736

 

919,724

 

779,988

34

32

 

 

 

142,573

 

932,757

 

790,184

35

33

 

 

 

145,467

 

946,251

 

800,784

36

34

 

 

 

148,420

 

960,225

 

811,805

37

35

 

 

 

151,433

 

974,619

 

823,186

38

36

 

 

 

154,507

 

989,323

 

834,816

39

37

 

 

 

157,643

 

1,004,462

 

846,819

40

38

 

 

 

160,844

 

1,019,957

 

859,113

41

39

 

 

 

164,109

 

1,035,914

 

871,805

42

40

 

 

 

167,440

 

1,052,325

 

884,885

43

41

 

 

 

170,839

 

1,069,250

 

898,411

44

42

 

 

 

174,307

 

1,086,825

 

912,518

45

43

 

 

 

177,846

 

1,104,986

 

927,140

46

44

 

 

 

181,456

 

1,123,809

 

942,353

47

45

 

 

 

185,140

 

1,143,375

 

958,235

48

46

 

 

 

188,898

 

1,163,695

 

974,797

49

47

 

 

 

192,732

 

1,184,860

 

992,128

50

48

 

 

 

196,645

 

1,206,849

 

1,010,204

51

49

 

 

 

200,637

 

1,229,724

 

1,029,087

52

50

 

 

 

204,710

 

1,253,566

 

1,048,856


 

 

 

 

Annual

 

Annual

 

 

Alternate

 

 

Perm. Life Ins.

 

 

P.L.I. Death Ben.

Age

Years

Deposit

Withdrawal

 

Account

 

Death Benefit

 

─ Alternate Acct.

53

51

 

 

 

208,865

 

1,278,365

 

1,069,500

54

52

 

 

 

213,105

 

1,304,151

 

1,091,046

55

53

 

 

 

217,431

 

1,330,928

 

1,113,497

56

54

 

 

 

221,845

 

1,358,841

 

1,136,996

57

55

 

 

 

226,349

 

1,387,920

 

1,161,571

58

56

 

 

 

230,944

 

1,418,172

 

1,187,228

59

57

 

 

 

235,632

 

1,449,551

 

1,213,919

60

58

 

 

 

240,415

 

1,482,066

 

1,241,651

61

59

 

 

 

245,295

 

1,515,724

 

1,270,429

62

60

 

 

 

250,275

 

1,550,532

 

1,300,257

63

61

 

 

 

255,356

 

1,586,482

 

1,331,126

64

62

 

 

 

260,539

 

1,623,599

 

1,363,060

65

63

 

 

 

265,828

 

1,661,941

 

1,396,113

TOTALS

(380,000)

(340,000)

 

265,828

 

1,661,941

 

1,396,113

 

And of course there is no comparison in terms of Death Benefit!

The Bottom Line

If you don’t fully understand the benefits and features of these types of policies, and you buy one from an insurance salesman who also doesn’t understand them (or doesn’t care to explain them to you), and doesn’t know how to properly structure them as a college savings vehicle, then it’s true – you may be better off investing in a 529 plan or some other college savings plan.

However, if you choose to work with a qualified advisor who is intimately familiar with how these policies work and how to design them in your favor, and who will guide you personally over the years to make sure you are using your policy efficiently to achieve the maximum benefits it can provide, then a life insurance policy can be one of the absolute best ways to pay for college – and beyond!

We believe there are a number of valid ways to plan and save for college and for other life expenses, and it is a shame that there is so much misinformation surrounding such a useful and foundational wealth-building tool as permanent life insurance. We do our best to clearly explain the pros and cons of both safer and higher-risk financial tools, so that our clients can make the best and most informed decisions possible when developing either a college or general financial plan.

If you’d like to learn more about utilizing cash value life insurance for college funding or any other insurance or estate planning concern, connect with us today.