2 Ways to Save For a Child’s Education – Which is Better for You?

529 Plan vs. Cash Value Life Insurance

The average annual spending on college ranges from $11,000 for 2-year public school to over $21,000 for 4-year public institutions. If a child plans to attend a private school, the cost can rise to almost $35,000 or more. On average, parents plan to cover 64% of their children’s total college costs. Unfortunately, most parents are behind in their saving goals and aren’t keeping pace.

“Many people don’t think of life insurance being used like this, but insurance such as cash value life insurance can be a very useful college saving strategy.”

When looking at the source of college funding, there are many resources that can be used, including grants, student loans, scholarships and a student funding their college education through a job.

There are various options for parents who are trying to save for their children’s education. 

One option is a 529 plan. “Section 529” savings plans allow parents to open an account and choose an investment strategy. Earnings accumulate tax free and withdrawals can be made tax free, when it’s time to pay for a child’s college expenses including tuition, books, and room and board. Money from a state-sponsored college savings plan can be used to pay for educational expenses at any accredited college or university.1

Another option that provides added flexibility and some protections from risk is a life insurance policy. While a 529 college savings plan typically fluctuates with the market, life insurance contracts can offer specific guarantees.

Many people don’t think of life insurance being used like this, but insurance such as cash value life insurance can be a very useful college saving strategy. Tax-free withdrawals or loans from the policy can be used to help assist with college expenses. Parents can also put money back into a policy to continue accumulating assets for their own retirement or future needs.

A 529 plan can be very beneficial, but the money from these plans must be used toward college tuition, fees and room and board. The earnings from the account can also potentially be taxed. If your child doesn’t go to college, the money cannot be accessed for other uses other than paying up to $10,000 a year for K-12 private school tuitions.

Cash value life insurance, on the other hand, allows for more flexibility and does not have limitations on the use of the funds. The cash value can be used to supplement the cost of college, but it can also be used for other financial needs.

Grandparents may also want to assist in paying for their grandchildren’s education. By paying planned premiums for a cash value life insurance policy owned by their child or grandchild, they can provide a wonderful gift to their grandchildren to help fund college.

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1 http://www.bankrate.com/finance/college-finance/life-insurance-or-529-for-college-savings-1.aspx
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