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?
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.
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.
Be very careful with this. The first step is to calculate your EFC with and without the 529 Plan. (Every college is required to publish a net price calculator on their website). Does it even make a difference? If your EFC is greater than the cost of attendance to begin with - the transfer has no advantage. If you liquidate a 529 Plan for non-qualified (not for college) expenses, you will pay a penalty and be taxed on any captital gains in the account. These fees will likely exceed any financial aid benefit you would receive by liquidating the 529 Plan.
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.
I would be very careful and wary of this advice. There may be taxes and penalties for withdraws from a 529 plan in a tax year in which you do not have qualified education expenses (assuming there are gains in the 529 plan).