09:00 AM – 05:00 PM (PST)

Monday to Friday

520 Broadway #200

Santa Monica, CA 90401


09:00 AM – 05:00 PM (PST)

Monday to Friday

520 Broadway #200

Santa Monica, CA 90401


College Financial Planning

College Financial Plans

As you choose a plan to help save for your child’s education, you may also want to find out how financial aid can help you pay for higher education costs. The prospect of paying for college may seem intimidating, but with proper planning, it doesn’t have to be.

529 Plan for College Funding

Before you open an account, get the facts on this tax-advantaged education savings option.

A 529 plan is an education savings plan sponsored by a state or state agency. Savings can be used for tuition, books, and other education-related expenses at most accredited two- and four-year colleges and universities, U.S. vocational-technical schools, and eligible foreign institutions. Savings may also be used for tuition expenses at eligible public, private, and religious primary and secondary educational institutions (K-12). U.S. residents of any state, who are 18 years of age or older (or the age of majority in some states), may invest in most state plans.

Any earnings grow federal income tax deferred and may also be eligible for state tax deductions. Distributions for qualified education expenses are federal income tax free.

People of all income levels; there are no income restrictions.

Any U.S. resident who is 18 years or older, has a U.S. mailing and legal address, and a Social Security number or Tax ID.

Anyone who has a Social Security number or Tax ID.

A future college student of any age—the beneficiary can even be the same person who sets up the account.

Grandparents or others who wish to contribute to a child’s education savings plan may want to open a 529 plan account. The owner of the account, also known as the participant, controls the account, including investment decisions and the distribution of assets. The account owner can take advantage of possible gift and estate tax benefits.

Grandparents, other relatives, or nonrelatives can also gift to an existing account. In fact, account owners can enroll in our free College Gifting program that provides a page for family and friends to easily contribute a gift electronically; plus a separate, private dashboard where the account owner can make edits, send invitations, track gifts, and more.

Contribute up to $75,000 ($150,000 per married couple) per beneficiary in a single year without the money being subject to the federal gift tax.* Once assets are in the account, they are generally considered to be no longer part of the account owner’s estate.

The account owner maintains ownership of the account until the money is withdrawn. Withdrawals from a 529 account can be taken at any time for any reason. However, if the money is not used for qualified education expenses, any earnings are subject to federal income taxes at the recipient’s rate. A 10% federal penalty tax and possibly state or local tax are also added.

If the beneficiary receives a scholarship or attends a U.S. military academy, the scholarship amount or cost of attendance can be withdrawn from the 529 plan account and the 10% federal penalty tax does not apply. However, the earnings are subject to any other applicable taxes, including federal income tax.

* An accelerated transfer to a 529 plan (for a given beneficiary) of $75,000 (or $150,000 combined for spouses who gift split) will not result in federal transfer tax or use of any portion of the applicable federal transfer tax exemption and/or credit amounts if no further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary are made over the five-year period and if the transfer is reported as a series of five equal annual transfers on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If the donor dies within the five-year period, a portion of the transferred amount will be included in the donor’s estate for estate tax purposes.

Life Insurance for College Funding

While the primary purpose of life insurance is to provide a death benefit to beneficiaries, it can also be used to create a self-completing plan to help fund a college education. Additionally, a key benefit of permanent life insurance, that doesn’t involve death, is that it has the potential to accumulate cash value on a tax-deferred basis. Those funds can then be accessed to help pay for college costs.

Life insurance used as a tool to save for college expenses is a strategy that stretches back for many decades, but its use is less well understood both by the general public and most licensed insurance agents. To help shed some light on this powerful and low risk plan, we decided to prepare the four reasons why cash value life policy is could another good option for college savings.

529 Plans accumulate tax deferred and one can use the funds tax free if and only if the funds go towards specified qualified expenses. Paying for expenses like: travel, computers, insurance, or housing in excess of university stated prices with 529 assets creates taxable consequences plus penalties. Life insurance faces no limitation to “qualified expenses.”

In addition, if your child decides not to go to college a crisis does not ensue. You can use the funds in a life insurance policy for anything, it’s easy to pivot and pay for something completely outside of realm of post-secondary education.

529 Plans have restrictive contribution limits. There are maximum imposed limits to qualify as 529 Plans. These limits are assumed to be the maximum cost of attending college and are generally several hundred thousand dollars.

But, contributions beyond $14,000 per person are generally subject to gift tax considerations (though 529 Plans have a unique ability to accept a lump sum contribution of $70,000 per person without gift tax consideration). Cash Value Life insurance has no specified contribution cap or gift tax implications for making contributions beyond $14,000 per year.

Life insurance cash values are not presently disclosed on the Free Application for Federal Student Aid (FAFSA). 529 Plans count as parental assets at 5.64% of total plan assets towards expected family contribution. Life insurance can also be used for those who have procrastinated a bit on planning for college financial aid to immediately shelter assets from financial aid consideration.

529 Plans really aren’t that bad, but they do nothing for a future Rhodes Scholar hopeful if a primary wage earning parent dies prematurely. Life insurance, on the other hand, is life insurance—after all—and comes with a death benefit that can easily and immediately cover the cash needs to pay for college. Life insurance can also be designed to ensure the contributions are made if a primary wage earning parents becomes sick or hurt and can no longer work. There’s an important implementation stumbling point I want to note. When using life insurance as a college savings tool, the parent—not the child—should be the insured.

COMPARISON CHART: Cash Value Life Insurance vs. 529 Plan for College Savings

529 Plan Cash Value Life Insurance
Save for Anyone: You can save money in a 529 plan for anyone — your child, grandchild, niece, nephew, friend, or even yourself. In permanent life insurance plans, you can also save for anyone - your child, grandchild, niece, nephew friend, or even yourself. In addition, a permanent life insurance policy offers the ability to save for any person, regardless of their relationship to you, as well as, any company, educational institution, or charity of your choice.
Tax Advantages: 529 plans are funded with after-federal-income-tax dollars. Your money in a 529 plan grows tax-deferred and withdrawals for qualified higher education expenses are free from federal tax. 'note: Some states also allow you to take a deduction on your state income tax filing for contributions you've made to a 529 plan. Permanent life insurance plans are funded with after-federal-income tax dollars. Your money grows tax-deferred and withdrawals are taken out as policy loans are tax-free as long as the policy remains in force. Permanent life plan cash value earnings also accumulate on a tax-deferred basis and, if managed properly (via withdrawals and/or loans), can be also be withdrawn on a 100 percent tax-free basis.
Contribution limits: For 2020, the maximum that one person can contribute to a 529 plan is $14000. The restriction is per beneficiary, per person, so a married couple can contribute $28000 to a 529 plan per beneficiary without incurring gift tax penalties. Another option for funding a 529 is to front-load the plan with a contribution that covers the next five years. This means that a person can contribute up to $70000 at once to a single beneficiary ($140000 for a married couple) without incurring gift taxes as long as no further gifts are made to the same beneficiary until the sixth year. Similar to 529 plans, permanent life plans have certain contribution limits, particularly within the first seven years of the policy. However, most permanent life plan contribution limits can be structured to exceed the limits of a 529 plan, and they are also not limited to the $350,000 lifetime limit of a 529 plan.
Investment Flexibility and Risks: 529 plans are investment-based, providing opportunities to invest in predetermined funds or portfolios. Permanent life plans do not offer investment-based options and the possible upside return: however, they offer NO downside investment risk. Permanent life insurance plans provide guaranteed cash value and non-guaranteed dividends. For many people, the peace of mind associated with safety and guarantees are far more attractive, particularly when saving for a specific time frame and/or goal such as college savings.
Control: You as the account owner, rather than the beneficiary of a 529 plan maintain full control of all account assets and determine the timing and amount of distributions. You as the account owner, rather than the beneficiary, maintain full control of the permanent life plan cash value and determine the timing and amount of distributions.
Beneficiary options: You can change beneficiaries, without penalty, provided the new beneficiary is a member of the previous beneficiary's family. You can change permanent life plan beneficiaries without penalty, at any time, and for any reason. In contrast to the family beneficiary restrictions of a 529 plan, a permanent life insurance plan allows you to change the beneficiary to any person institution and/or charity. You can also have as many beneficiaries to receive whatever percentage you choose as long as the total allocation across all beneficiaries equals 100%.
Financial Aid Impact: 529 plans are included in the calculation of a parent's assets of expected family contributions as in related to a student applying for federal financial aid for college. Life insurance values are NOT included in the federal methodology for calculating financial aid, so you will not be penalized for saving for college.
Non-qualified Withdrawal Penalty: If not used for qualified tuition expenses, there is a 10% federal excise penalty over and above any income tax. There are no such restrictions. Cash value withdrawals can be used for any purpose whatsoever and there are no penalties.
Ability to be used for colleges outside of U.S. 529 plan funds can only be withdrawn without penalty for use at accredited colleges by the US Department of Education. Withdrawals from permanent life insurance plans can be used to help the student to attend a college in the U.S. or an international college. There are no restrictions.