Life insurance can be used for college funding and can be a great resource for families.    The way that this type of plan is set up typically is through whole life insurance or universal life insurance.   It is a great tool for this as it sets up very flexibly and provides a good outcome no matter what happens.  I will compare below to a 529 plan, which is a very popular education funding tool

Client 1-  Decides to use  a 529 savings plan to fund his childs education.   His child is 2 at the time and therefore is invested in a fairly aggresive mutual fund allocation.  The idea with 529′s is that as the child gets closer to going to school, the investments are migrated to more conservative investments.

Money from a 529 plan can be used for tuition, fees, books, supplies and equipment required for study at any accredited college, university or vocational school in the United States and at some foreign universities.  They place restrictions on how the funds can be used.  The money can be accessed income tax free for college if all the rules are followed.   If the money is not used for college, then the money is income taxable and subject to 10% early withdrawal fees.  The money can be accessed without penalties under certain hardships.

What if the 529 funds don’t perform well and are down 20% when the child goes to school?  What if the child gets a full scholarship to school?  What if the client passes away after funding the plan for only 2 years?

Client 2- Is using a whole life insurance policy for his 2 year old’s college funding.   He will overfund the policy to the MEC level to allow him to have a larger pool of money in play that can grow tax-deferred.   The policy will have guaranteed cash values and will never go down.  He has no market risk with the life insurance.   If the child gets a full scholarship, he has created a fund that will be great to provide extra spending money for his child, an emergency fund for him for living or for investing, and/or a huge pool of money that can help supplement his retirement.  All of these options are not dictated by the government and all the options are available to him with no penalty and no taxation.   If he were to pass away, he has a great leverage tool with the insurance, which will provide a windfall to his family.  The death benefit will be much bigger than the cash value and will be more than enough to cover college and income to the family.  With a 529, his family would receive only whats in the account at that time.

A 529 plan can be a good planning tool for a college education, but whole life insurance provides much more flexibility.    For a free analysis of your situation please email vince@paramountlifeinsurance.com.