A college education is something that most parents want to provide for their children. In America, having a solid education is key to landing a better job. But saving for this education can be daunting. Fortunately, college savings tools like 529 plans and permanent life insurance make it easier to save for educational expenses.
Below you’ll find more information about 529 plans and whole life insurance in NJ and which one is a better college savings plan.
529 Plans vs Whole Life: What’s the Difference?
529 plans in New Jersey are similar to a Roth 401K or RothIRA but are intended to help pay for college expenses rather than retirement. Through a 529 plan, you can invest in a variety of mutual funds and earnings will grow tax-deferred. As long as your child uses the money for educational expenses, the withdrawals are tax-free.
While a 529 plan is the gold standard for saving for college, it’s not your only option. Permanent life insurance is also an excellent way to save money. When you pay into your policy each month, some of the money goes towards the premium and some goes into the cash value. The money in your cash value grows tax-deferred, similar to a 529 plan.
Why Permanent Life Insurance is Better than a 529 Plan
Each family is unique, so you’ll have to make the best decision for your circumstances. That said, Leonard Financial Solutions typically recommends whole life insurance as a college savings plan. Here are the reasons why.
- No qualified expenses. Your child can only use the funds tax-free in your 529 plan if they are used for college. Whole life insurance, on the other hand, has no limitations. Your child can use the money to buy a home or pay for their wedding.
- No contribution cap. 529 plans have restrictive contribution limits. Whole life insurance does not. If a grandparent wants to make a generous contribution, they can.
- Not included in your financial picture. When applying to college, a 529 plan is considered in your overall financial picture. This can affect your ability to get financial aid. Life insurance does not.
- Includes a death benefit. 529 plans are a fine college savings tool, but they include nothing more. Permanent life insurance comes with a death benefit. We generally recommend insuring the parent, not the child.
- Not correlated to the market. If the stock market declines, your life insurance policy remains untouched. This makes whole life insurance a recession-proof savings tool, unlike 529 plans.
529 plans are not bad. They have many advantages, and we understand the appeal to them. However, they are not the only way to save for your child’s post-secondary education. Permanent life insurance is worth a look. If you would like a life insurance quote comparison in NJ, contact Leonard Financial Solutions.