You may know a 529 plan as a tax-advantaged savings vehicle to help fund a college education (Not familiar? See below). You should consider whole life insurance as an alternative with similar contribution, accumulation and distribution tax features of a 529 plan, but with additional benefits. This option will allow you to:
• Borrow cash values via policy loans, for college or other uses, without a taxable event. Distributions, for any purpose, are not taxed under current law provided the policy avoids Modified Endowment Contract (MEC)
status and remains in force.
• Have guarantees without market volatility. Whole life provides guaranteed premiums, death benefit and cash value that won’t decrease based on financial market performance. Any dividends paid will enhance the cash values and death benefit.
• Offer options in case of disability. It’s crucial to make sure money will be there to pay for college in the event of a disability. An optional waiver of premium rider can guarantee the proper funding stays in place.
• Provide a solution that may not affect financial aid considerations. A life insurance policy’s cash value is not counted as an asset for the policy owner under current FAFSA™ financial aid guidelines. Note: some colleges do view life insurance as an asset in determining financial aid.
• Help fund an education should the unthinkable happen. Unlike a 529 plan, life insurance provides an income tax-free death benefit to a beneficiary which could fund an education.
There may be situations where whole life insurance won’t work. It’s best to use whole life as a college savings option when a child is young so the policy can build enough cash value to properly cover college expenses. It may be wise to use an optional Additional Paid-Up (API) rider to supplement the early build-up
of cash values. Without the API rider, the policy may not build enough cash value to provide for college tuition when you need it.
Whole life insurance can play a key role in you college funding plan with tax-preferred access to cash values and additional benefits that provide added flexibility, protection and guarantees without market volatility.
A Closer Look at a 529 Plan
A 529 plan is a traditional savings vehicle for college planning because contributions are made on a federal after-tax basis and earnings grow tax-deferred. Withdrawals from the plan for qualified education expenses are on a federal, and often state, tax-free basis. The donor may be eligible for state income tax deductions on their contributions. 529 plan funds can be tied to market returns, providing a potential account value increase year over year. While the plan has powerful tax-based benefits, it has limitations and disadvantanges to consider:
• Distributions for uses other than qualified education expenses may result in tax ramifications. For instance, a non-qualified distribution would be subject to ordinary income tax, as well as a 10 percent penalty on the gain. Imagine if you had to access 529 plan funds because of a lost job or family emergency. Not only did you already pay taxes on the money before it was contributed to the plan, but you also would have to pay taxes on a portion of the earnings withdrawn, plus a 10 percent penalty.
• 529 plans are often invested in accounts subject to market volatility. What if your child started college in 2009 after the market crashed? Would you feel comfortable in your ability to pay your child’s tuition relying solely on the investments in your plan?
• 529 plans offer no options to fund the plan in the event of a disability. If disabled for 90 days, would you be able to cover living expenses and continue plan contributions? What if 90 days turned into two or five years? It’s not a stretch. The average long-term disability is 2.6 years.
• 529 Plan values may affect financial aid. FAFSA™ considers a 529 plan as an asset of the parents, if they’re the account owner, and will apply the plan value to the family contribution level toward college costs. A higher dollar amount in the plan may mean a lower amount of financial aid to be obtained.
*The article you just read is provided by Ohio National Financial Services. For a PDF version of this information, please download or open the link below for Ohio National's brochure of this material.
status and remains in force.
• Have guarantees without market volatility. Whole life provides guaranteed premiums, death benefit and cash value that won’t decrease based on financial market performance. Any dividends paid will enhance the cash values and death benefit.
• Offer options in case of disability. It’s crucial to make sure money will be there to pay for college in the event of a disability. An optional waiver of premium rider can guarantee the proper funding stays in place.
• Provide a solution that may not affect financial aid considerations. A life insurance policy’s cash value is not counted as an asset for the policy owner under current FAFSA™ financial aid guidelines. Note: some colleges do view life insurance as an asset in determining financial aid.
• Help fund an education should the unthinkable happen. Unlike a 529 plan, life insurance provides an income tax-free death benefit to a beneficiary which could fund an education.
There may be situations where whole life insurance won’t work. It’s best to use whole life as a college savings option when a child is young so the policy can build enough cash value to properly cover college expenses. It may be wise to use an optional Additional Paid-Up (API) rider to supplement the early build-up
of cash values. Without the API rider, the policy may not build enough cash value to provide for college tuition when you need it.
Whole life insurance can play a key role in you college funding plan with tax-preferred access to cash values and additional benefits that provide added flexibility, protection and guarantees without market volatility.
A Closer Look at a 529 Plan
A 529 plan is a traditional savings vehicle for college planning because contributions are made on a federal after-tax basis and earnings grow tax-deferred. Withdrawals from the plan for qualified education expenses are on a federal, and often state, tax-free basis. The donor may be eligible for state income tax deductions on their contributions. 529 plan funds can be tied to market returns, providing a potential account value increase year over year. While the plan has powerful tax-based benefits, it has limitations and disadvantanges to consider:
• Distributions for uses other than qualified education expenses may result in tax ramifications. For instance, a non-qualified distribution would be subject to ordinary income tax, as well as a 10 percent penalty on the gain. Imagine if you had to access 529 plan funds because of a lost job or family emergency. Not only did you already pay taxes on the money before it was contributed to the plan, but you also would have to pay taxes on a portion of the earnings withdrawn, plus a 10 percent penalty.
• 529 plans are often invested in accounts subject to market volatility. What if your child started college in 2009 after the market crashed? Would you feel comfortable in your ability to pay your child’s tuition relying solely on the investments in your plan?
• 529 plans offer no options to fund the plan in the event of a disability. If disabled for 90 days, would you be able to cover living expenses and continue plan contributions? What if 90 days turned into two or five years? It’s not a stretch. The average long-term disability is 2.6 years.
• 529 Plan values may affect financial aid. FAFSA™ considers a 529 plan as an asset of the parents, if they’re the account owner, and will apply the plan value to the family contribution level toward college costs. A higher dollar amount in the plan may mean a lower amount of financial aid to be obtained.
*The article you just read is provided by Ohio National Financial Services. For a PDF version of this information, please download or open the link below for Ohio National's brochure of this material.
| Ohio National - A 529 Plan Alternative |
Jonathan Leonard
Jonathan Leonard is the owner of Jonathan Leonard Insurance
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