529 Alternative

Today, most people are saving money for college, using 529 plans. 529 plans have some nice tax benefits and some great advantages. These plans have become the most popular way people save money for college. Today we want to introduce to you an alternate way to save for college. Though 529 plans have potential growth at the end of the day, the investments in a 529 plan are not guaranteed and could potentially be worth less than what you actually saved. In addition, the traditional 529 plan balances can potentially have a negative impact on the overall financial position of the person saving money for college.

What I want to try to do today is to introduce you to this alternative way to save money for your children or grandchildren.

Parents or grandparents can fund a 10-pay life insurance policy on, let’s say, for example a 5-year old child, paying $1,000 a month ($12,000 a year) for ten years. Regular savings, including the 529 plans, could affect the child’s ability to take advantage of various forms of financial aid. Or let’s say your child gets a full scholarship, then the 529 money which now may not be used for college, could create a tax. However, in contrast having money in life insurance should not have any negative impact on the potential to receive financial aid. Especially when the policy is not owned by the child going to college.

The 10-pay life insurance policy alternative is unconventional thinking. When preparing to pay for college, students can apply for grants, scholarships, and financial aid, with the remaining balance to be paid by loans. These loans could come from home equity lines of credit, Stafford Loans (subsidized or unsubsidized), etc. When you take out a college loan, the debt is deferred while you are a full-time student. When due, the debt could be paid back, for example, over a 15-year period by loans from the 10-pay life insurance policy.

The insurance company currently has a 5% adjustable loan interest rate and a dividend interest rate of 7%. In our example we are using, the insured / policyowner will repay their college loans by taking loans out of the policy starting at age 23. For the next 15 years, they pay back the college loans and also potentially have money to get started. All distributions will be taken as policy loans with the loan interest being collateralized, and there are no taxes when you withdraw the money (via loans), even at the point where the amount withdrawn is in excess of what was paid in. The key here is to keep enough money in the policy to keep it inforce. And the amount that can be withdrawn will be directly impacted by the dividend and loan interest rates.

Here is one of the differences between this plan and a 529 plan. When you use a 529 plan you are saving money for 18 years and then you would normally spend it down to pay for college. With the 10-pay plan, based upon that original payment of $1,000 a month for 10 years, and after paying back the college loans, there is still enough equity in the policy to provide at age 65, a retirement income of approximately $40,000 a year for 20 years. (Based upon current dividend scale and current loan interest rates, which are not guaranteed to stay the same.)

* The above chart is a hypothetical example that shows the impact of the maturity of money.

When you look at the yield curve above, which is how money grows over time, the older the money is, the more it will grow. By utilizing this concept of a life insurance policy purchased at the child’s age of 5 and paid for over 10 years, you have a policy that continues to grow even after college. You use the money in the policy but you don’t deplete it all and the continued growth will enable you to have the additional retirement benefit. So at age 65, pulling out approximately $40,000 a year for 20 years, you will have pulled out over $1,000,000 to pay for college and retirement, and you will still have cash values and a death benefit. (Click here for an example of how this concept could work.)

This can be an exciting alternative to 529s, one that some people might want to consider. The concept of life insurance for savings is not widely utilized but I think it can make a lot of sense and can provide people with significant guarantees, tax benefits and flexibility.

Call me if you have any questions. We would love to show you how this concept would work for you.

Your questions and feedback are very important to me.

Please email me at michael@swanwealth.com

Securities offered through American Portfolios Financial Services, Inc. (APFS). Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. Strategic Wealth Advisors Network and G&G Planning Concepts, Inc. are not affiliated with APFS.

Strategic Wealth Advisors Network is not affiliated with APFS.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.

Potential investors of 529 plans may get more favorable tax benefits from 529 plans sponsored by their own state. Consult your tax professional for how 529 tax treatments would apply to your particular situation. Please carefully consider investment objectives, risks, charges, and expenses before investing. For this and other information about municipal fund securities, please obtain an offering statement and read it carefully before you invest.

*To Determine which College saving option is right for you, please contact your tax and accounting advisor. Neither APFS nor its affiliates or financial professionals provide tax, legal or accounting advice.