Life Insurance for College Savings

Jan 15, 2016

  1. marindependent
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    marindependent Guru

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    I have heard claims, rather often, how Life Insurance, Whole and IUL, can be a better choice to save for college than a 529 plan. To date, I have never read an explanation that satisfied me as to why that is.

    With all seriousness can someone explain to me in simple language how and why this could be the case?

    Thanks!
     
  2. HoosierLife
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    HoosierLife Want to write $20,000+ Guaranteed? bit.ly/learnfe

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    I'm sure DHK or Scag will come in shortly for the long complete answer, but I Believe it has to do with using the cash value to pay for college. A loan that you don't have to pay back.

    Then you invest money in a 401(k) or something like that. By pulling money out of an investment you lose a lot more down the road than using the CV in a life policy.
     
  3. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    1 - 529 plans are an asset that is included in the FAFSA filing when applying for college aid. It counts against the student, if it's in the student's name at a high rate (I can't remember the % right now - but it's something like 25%) and against the parent at 5.4% (if I remember correctly). The best way to title a 529 plan is in the grandparent's name, not a parent or child.

    2 - 529 plans are generally invested in mutual funds, which have stock market volatility.

    3 - 529 plans are limited for what you can spend the money on. They are only for qualified educational expenses only - tuition, books, lab fees, etc.

    4 - If the plan is not used for school, you can change the plan beneficiary. Otherwise, if these funds aren't used for qualified educational expenses only, the plan will be subject to a 10% penalty on the growth of the account.


    The only advantage I see is that you could have a state tax deductible contribution, depending on your state and choosing the plan for your state. I'm in California. We have budget issues. There is no tax-break for contributing to the state's 529 plan.

    In comparison to life insurance:
    1 - Life insurance still grows tax deferred.
    2 - Is not an included asset on the FAFSA form, so it doesn't count against you for filing for aid.
    3 - You can use it in any way you want.
    4 - You can BORROW against it, so your original balance can continue to grow as though you haven't touched it, as long as you pay the annual loan interest every year to restore the cost of loan interest back to the policy.
    5 - Assuming that you're not working with a variable insurance contract, there is no stock market volatility to manage.

    Bonus reason #6: When compared to qualified retirement plans, yes, you can withdraw money without penalty for qualified educational expenses only + cost of a computer (that's new for 2016), but they are still included in your taxes for the year. This then becomes included in your total income when you file your FAFSA the following year. No such penalties or issues when using life insurance.

    Hope that helps some.
     
    Last edited: Jan 15, 2016
    DHK, Jan 15, 2016
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  4. LGilmore
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    LGilmore Guru

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    The best aspect of CVLI I experienced was filling out the FAFSA information. It just SEEMS like everything else you've done in life that builds value is used against you when it comes to this.

    Believe me, it's the pits to enter everything you've done and have it work against you. Not counting Life CVs feels pretty good when you go through this. If you haven't done this you may not understand but it is one of those times in life where you question yourself as just about everything you've done is essentially a black mark with FAFSA.
     
    LGilmore, Jan 15, 2016
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  5. DHK
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    DHK "YOU CAN'T HANDLE THE TRUTH!"

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    Retirement plans (such as 401k and IRAs) also don't count against you, but do most people know that if they hold stock in their 401k plan it still doesn't count? Or do they include that non-includable asset when filing their FAFSA?

    Also, there is a difference on how private colleges vs state colleges look at assets. Generally state colleges will ignore any home equity while private schools will include it in the Expected Family Contribution.

    What College Aid Officers Won't Tell You - CBS News
     
    DHK, Jan 15, 2016
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  6. Brian Anderson
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    Brian Anderson Executive Editor

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  7. walthamny
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    walthamny Guru

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    Also lets think the positive, your child gets a full scholarship room and board included to ivy league school, there is very little you can use 529 for, cash value life insurance is flexible, you can use it or let it grow more.

    Some private colleges ask for how much you have in cash value life insurance, so while they are not included on FAFSA, some schools ask on a supplementary application the balance of cash value life insurance.

    There is also the ownership issue. 529 plans are almost always owned by parents, the ownership does not transfer to the kids. With permanent cash value life insurance you can transfer ownership whenever you wish once they attain age of majority.
     
  8. LGilmore
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    LGilmore Guru

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    It's been a decade plus now, but I recall questions about retirement plans and home equity. About the only thing untouched was the cash value. Real estate holdings as well. And both of mine were on full scholarship, but they required the FAFSA anyway. Something about federal funding.. been awhile

    but it sure seemed like anything that had an appreciated value was asked about.
     
    LGilmore, Jan 16, 2016
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  9. Robert Barney
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    Robert Barney Guru

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    Or there's a bank account...
     
  10. LGilmore
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    LGilmore Guru

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    No Bob, they ask you for your bank account balances too.

    The conversation is about what you can exclude from FAFSA. Which isn't much.
     
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