Saving for college can be a long, arduous process. If you want to secure your child’s education, a 529 plan or an index universal life insurance plan may be desirable. Here are the differences between the two, including advantages and disadvantages.
State-run 529 plans function similarly to Roth 401(k) and Roth IRA accounts. Though, 529 plans are intended for education rather than retirement. With a 529 savings plan, you can invest in mutual funds, allowing your earnings to grow tax-deferred. As long as the money is used for qualified education-related expenses, withdrawals are tax-free. Some states even offer tax deductions or tax credits when you contribute to their plans.
An indexed universal life plan is a form of permanent life insurance. For every dollar you pay in premiums, a portion is invested in a separate cash-value account. Indexed life insurance plans allow your cash-value account to grow tax-deferred at rates determined by market performance. By using this account to save, you can gradually put away enough money to pay for a student’s education. Though, when you take a loan from the account, your death benefit will be reduced if you don’t pay it back.
The 529 plan is mainly beneficial because of the built in tax breaks. With a 529 plan, you can invest in a variety of mutual funds and have your earnings grow tax-deferred. As long as the money is used on education, you can make withdrawals tax-free. In contrast, IUL plans allow you to grow your savings tax-deferred, but you can make withdrawals for anything. That means you aren’t limited to using the money for education. This can be helpful, especially if extreme life circumstances demand that you have an increased income.
A downside to using life insurance for college savings is that you have to start early to have enough money in your cash-value account. You’d likely need to purchase the insurance policy when your kid is in kindergarten for it to grow to the point where you can use it to pay tuition bills. Annual expenses will chop away at the value of your policy, so make sure that an IUL is the right path to pay for your child’s education.
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