529 Plan for College Savings or Indexed Universal Life Insurance (IUL) - Which is Better?
A 529 plan for college savings is good, but indexed universal life insurance (IUL) may be better under certain conditions. Both are taxed much like a Roth, with contributions from after-tax dollars. Each has tax-deferred growth and may be able to provide tax-free distributions. Here are some differences:
- 529 plan distributions must be used solely for education expenses, or else the gains be subject to ordinary income tax, plus a penalty. IUL funds are available tax-free for any purpose at any time, so long as they are taken out using participating policy loans.
- 529 plans have no provision to be self-completing in the event of death or disability of the parent doing the saving. IUL always pays a death benefit, and may be self-completing due to disability, assuming a waiver of specified premium rider is included.
- One of the challenges with saving for college is that your assets may factor into financial aid calculations. The more assets you have, the more your family is expected to contribute toward the costs of college. That usually means a reduced financial aid package. However, life insurance (including indexed universal life insurance) isn’t included in financial aid analysis, while assets in a 529 plan may be. That means you can use an IUL policy as a college funding vehicle without being concerned about how it will impact financial aid.
- A 529 plan is subject to tax and penalty if distributions are for colleges outside of the U.S.. IUL distributions have no such restrictions.
- Most 529 plan investments may suffer losses. The investment component of IUL will never suffer an investment loss, while still offering nearly unlimited upside potential.
- You are limited as to how much you may contribute to a 529 plan. IUL contributions are virtually unlimited, since they are limited only by the amount of insurance you can qualify for.
Funds in a 529 plan may grow more in the first 10 to 15 years than contributions to IUL. While IUL is front-loaded for expense charges, for many instances of 529 plans vs. IUL, IUL will compete with, or even outperform the investments of a 529 after that duration. Even when college comes sooner than 15 years, if one presumes the IUL serves more than the single purpose of college, such as later providing retirement for the parent, IUL may still look quite attractive. Also, the duration for education comparison should be until graduation of the last of your children to be benefited.
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