Should I convert my 529 Plan into a whole life insurance policy?
I currently have a 529 plan with $25,000 in it. My college financial planner advised us to move those funds into a whole life insurance policy with a cash value feature. The idea is that this will lower our Expected Family Contribution (EFC) for college tuition payments. What are the advantages of doing this? With the amount I have saved, is it worth it?
Here's a look at the logic your financial planner is trying to explain to you.
Under the EFC calculations, students' parents assets are assessed to find out how much financial aid can be received. With other non-retirement assets, your 529 will be added to the amount of assets that can be used in the calculation. Your 529 will affect your EFC by a maximum of 5.64%. Which means that it will increase your EFC number by $1410. Life insurance cash value is not included in the calculation. However, this small savings would only grant a smaller portion of student aid.
Making the conversion would cost you much more than what you would gain!!! Cashing $25,000 out of a 529 plan, would mean that you would have to pay 10% penalty on your growth + taxes. Depending on the amount you contributed to it, this might be a lot more than the small amount of financial aid you would gain.
You would also probably lose upside! Depending on the age of the student, you might be looking at years of possible investment growth. Cash value insurance are front-loaded with fees, which makes it hard to make money on short/medium term investment goals.
I think you get the point... It would be your financial planner/insurance agent that would benefit the most from the transaction he/she is recommending.
I hope this helps.
This is bad advice from a financial planner who is probably getting a kickback or commission for the life insurance policy. You should simply keep your 529 plan and use the money in it to pay for tuition and other qualified expenses. It will likely be used up quickly given the current costs of a college education.
To analyze your options, you will have to look at it in two ways.
- Flexibility: According to the Internal Revenue Service, money in a 529 college savings plan can only be used for "qualified education expenses" including tuition, fees, books, and room and board at an accredited U.S. school. You may also have to back taxes if you've taken state tax deductions over the years as well as a 10 percent penalty on earnings.
Life insurance policies are more flexible though and it doesn’t matter how you use the cash.
- Risk: 529 college savings plans fluctuate with the market. Whole and universal insurance policies frequently provide guaranteed returns if time is on your side. In the first two years of a life insurance policy you're getting a minimal of rate of return because (insurance providers) are pulling out the costs. After 10 or 12 years, you will see a rate of return of 4 (percent) to 5 percent.
Guaranteed returns can cap your earnings. Should the market generate returns above the fixed rate on your policy, life insurance holders may not earn any additional cash -- whether you can depends on your insurance provider and policy.
It is very bad to save for college using a life insurance policy.
I am afraid your college financial planner may benefit from going back to school. Your 529 account is the best investment vehicle for you to meet college expenses and should not preclude you from taking any grants or scholarships provided it has been set up properly. You should not be the owner of your 529 plan, you should be the beneficiary. That is a very important point, because technically, you then do not own the funds and the owner of the 529 could change the beneficiary at any time to benefit someone else. If you cashed the 529 out to invest in the Life insurance as was proposed to you, someone will have a large tax bill to pay. It is not coincidental that your planner recommended you to buy Whole life insurance. That is in his best interest because it will pay him the highest commission he can get for selling life insurance. At your age, if you need life insurance you should buy term insurance. As a general rule it is good to try and keep your life insurance separate from your investments.
No way. Whole life insurance is a bad vehicle for saving for college. These policies are great for accumulating cash on a guaranteed basis, and usually on a non-guaranteed basis as well. But they need decades to really prove their worth. The college planning time horizon is too short to really get your money’s worth. And, considering the cost of college these days, you would need a lot more than $25,000 to jumpstart the cash accumulation if you wanted to speed things up.