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Better Way to Fund Your Grandchildren’s College Education
Much press coverage has been done on the new “529”
savings plans as a vehicle for tax-free accumulation of money
for college expenses, and yes these plans are very attractive
investment vehicles. But like all investment options, they
have their limitations too, and for some investors there may
be a better alternative.
Variable Life Insurance offers an alternative that offers
additional flexibility for grandparents who wish to provide
for their grandchildren’s education and who potentially
want to leave larger sums of money to them free of income
and estate taxes.
This table provides a quick comparison:
| |
529 Plans |
Variable Life Insurance |
| Choice of Investments |
No- once you pick your allocation,
it's fixed for the duration |
Yes- Wide variety of fixed and
variable investment accounts that can be changed at will |
| Limitation on investment amount |
Yes- most plans max out around $250K |
No |
| Account remains in the control of donor |
Yes |
Yes, and you or your trust can designate
another party to control your account |
| Included in the estate of the donor |
Yes |
Yes or No. If policy is owned by the owner,
but if purchased via a trust or other party, then it is
not included in the donor's estate |
| Death benefit to child if donor dies before
completely funding account |
No |
Yes |
| Taxability of withdrawals. |
Currently withdrawals for qualified educational
purposes are free of federal tax. State taxation may vary.
If money is withdrawn for any other purpose, amount is
subject to income taxes plus penalties. |
None, withdrawals are tax-free up to cost
basis and loans are tax-free if policy remains in effect
throughout donor's life. Death benefits are free of income
taxes. |
| Gifting Power |
$55K per year, per donor though this amount
may be subject to taxes if donor dies within 5 years |
$11,000 per year , per donor |
| Costs |
Similar to mutual funds with an annual maintenance
fee |
Similar to mutual funds for the sub-accounts,
plus mortality and expense charges. |
A primary benefit of using VL for this purpose include a
guarantee that your recipient’s education will be paid
for if you die before fully funding the account. There is
also no limitation on how you choose to spend withdrawals,
loans or the proceeds from a life insurance policy. Thus,
that money could be used for any purpose without the tax penalties
assessed to money withdrawn from a 529 plan that isn’t
used for qualified educational purposes (income taxes plus
10% penalty). This means that money could also be used to
help your grandchildren purchase a first home or anything
else you deem suitable.
For whom is this approach best suited? Ideally you are in
good health. The better your health the less expensive the
cost of the life insurance part of the plan. Contact your
insurance agent or financial advisor to see if this is a good
option for you.
For more information on how to make the most of your money,
get your free financial booklet here .
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