Tax-Free Strategies to Save for College Even If the Unexpected Occurs

When most parents and grandparents think about setting aside funds to save for a child’s future college education, they will oftentimes automatically consider using a 529 college savings plan. But this isn’t necessarily the best way to go about ensuring that there will be a certain sum of money available for college expenses.

Based on recent research conducted by Campus Consultants, Inc., as the cost of higher education continues to go up, families could be looking at a six-figure per-year price tag, depending on where a child opts to attend. This is especially the case if the child is still very young.

Projected Tuition Costs Fall 2029-Spring 2030

School Type 5% increases 6% increases 7% increases
4-Year Public         (out of state) $71,373 $84,651 $100,239
4-Year Private (non-profit) $92,869 $110,146 $130,428
4-Year Public (in-state) $41,228 $48,898 $57,609

Source: Campus Consultants, Inc.

*Includes the cost of room and board.

The contributions that go into a 529 college savings plan are not tax deductible. However, the money that is inside of the account is allowed to compound tax-deferred. In addition, the distributions from the account that are made to the beneficiary can be withdrawn federally tax free, and possibly even free of state income tax, too, depending on the state.

If an individual chooses to use a state-sponsored 529 plan, then the state will actually set up the plan with an asset management company of its choosing, and the asset management company would then, in turn, set up the plan according to the predetermined requisites of the particular state.

But, while a 529 college savings plan can help to save money for future college costs, though, there can also be certain rules related to such plans that can render them to be somewhat restrictive.

For example, according to IRS rules, the money must be used at a “qualified educational institution” – which is considered to be any college, university, vocational school, or other post secondary institution that is eligible to participate in a student aid program that is administered by the United States Department of Education.1

The “qualifying expenses” that the money may be used for will typically include the following:

  • Tuition
  • Fees
  • Books
  • Room and Board
  • Certain types of computer equipment

 

Another Viable College Savings Option to Consider

There is another option, though, that can not only provide tax-free funds for college savings, but that can also offer extra added security that there will be money available for the child’s higher education, even if the provider of those funds is no longer there. This involves setting up a college savings plan with life insurance.

A permanent life insurance policy can in fact provide the ability to save money on a tax-deferred basis within the cash value of the policy. And, the death benefit on the policy can ensure that even if the unanticipated were to occur, the child / beneficiary will have tax-free funds to use for his or her future college expenses. In addition, if funds are taken as a loan against the policy’s cash value, they can be obtained tax-free.

There can be other advantages to using life insurance as a college savings vehicle, too. For instance, unlike the 529 college saving plan, the funds that come from a life insurance policy – regardless of whether the funds come from the death benefit or from the cash value – may be used for any type of expense. With that in mind, if the child attends a school that is not considered a “qualified educational institution” by the IRS, the life insurance funds may still be used. It can also be used for other, non-school related costs.

 

Considerations When Using Life Insurance for College Savings

When using life insurance as a college savings vehicle, there are several important factors to consider. For example, the policy should be permanent as versus term. This is because term life insurance will not build up cash value within the policy. Plus, these policies essentially have “expiration dates” on them, meaning that the coverage could expire before the money is needed.

Also, when choosing the type of permanent life insurance policy for college funding, it is important that the plan offer a guaranteed cash value. That way, clients will know that they have a certain amount of money available in the cash component at a given time.

 

Taking the Next Step

Many clients are not aware that there are college savings strategies available to them other than using the popular 529 plan. By showing your clients how they can achieve their college savings goals in a tax-free manner – even if the unexpected occurs, and without restriction on where the money may be spent – you can help them to provide funds for their loved ones’ future education, as well as give them additional financial security.

If you want to learn how thousands of other insurance professionals are already using these strategies to earn a substantial income every year, while at the same time helping their clients to solve their college funding issues, contact us at 1-800-643-6143
anytime Monday – Friday from 9:00 am – 4:30 pm.

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Brian J. Kay, Executive Director, Leads4Insurance
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