529 College Savings Plan vs. Permanent Life Insurance


Hi, I’m Eszylfie Taylor, creator of the Taylor Method. How do you save for your
kid’s college education? Let’s take a 529 plan. Now, when you make
contributions to this plan, you do not get a tax deduction
for your contribution. You do however get tax deferred growth and if you take distributions for
a qualified educational expense, those distributions are tax free. Sounds pretty good. The 529 plan has its limitations. If you don’t use that money for
a qualified educational expense, the owner is subject
to a 10% IRS penalty if you take a distribution before
the age of 59 and a half. After age 59 and a half, those
gains are subject to taxation. So, what’s the alternative? Let’s consider a traditional
permanent life insurance policy. I don’t get a tax deduction for my contributions
or premium payments to the insurance policy, I do however get tax deferred growth and I get tax free distributions,
just the same. But that’s where the similarities end. See, whether or not I use that
money for a college education, I can take that money tax free. So, what if your scholar doesn’t
end up wanting to go to college, or better yet, they get a full scholarship? Those monies can be used for anything, whether it be to buy their first home,
or open a business, pass on to a loved one, right, so it just gives you more
in the way of options. So, consider this, when you’re filling
our financial aid documents, you’re asked how much money
do you have in stocks, bonds, mutual funds, 529 plans. You’re not asked how much cash
value you have in your insurance policy. So, whose more likely to get
the scholarship or the financial aid? The person with money in the 529 plan,
that has to be disclosed, or the person with the cash funding
insurance policy that doesn’t. You be the judge. So, what’s better, a 529 plan,
or an insurance policy? It really depends really on the client, and what they’re trying to accomplish, for example, if someone wanted to make
a contribution one time, right, and they weren’t going to make
such good contributions, I would probably go with the 529 plan, but if someone’s going to make consistent
contributions on an annual basis, I might look to an insurance policy. Why? Because I have a non-correlated
asset class, right, I have assets that are growing, free of stock market risk
and volatility, right, that’s typically associated
with a 529 plan. So, if your clients looking for something that
gives them more in the way of flexibility, more of a predictable outcome
rather than a probable one, and they want to be able to use
that money for tax free use, whether it be for college
or anything else, then a life insurance policy may
very well be the way to go.

4 comments

I’ll be finishing college soon and this is my favorite career path as of now. I just have to say thank you because you are the one guy who answers the exact questions I am thinking of

Only point I'd add is that you can deduct the amount of a scholarship for no penalty. Meaning, your child earns a $10,000/year scholarship, you can pull $10,000 each year out of the 529 plan for no penalty, in addition to whatever else you pull out to go to the rest of the school expenses.

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