Brian McLane

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USING LIFE INSURANCE OVER A 529 PLAN FOR COLLEGE FUNDING

September 5th, 2011 · No Comments · Family and Friends

Recently my friend Nicky asked me about college funding for his baby. In fact his kid is almost 2 and he has to get moving. Me personally, I don’t even want to calculate what college is going to cost for Sofia. I guess I’m hoping scholarship for Nodari and he can pull it off being from the Republic of Georgia, a gifted dancer and soccer player.

But I still have a modest $100,000 whole life policy for him at 12 will wont show much by the time he starts college but with Sofia (also $100,000) it’s great. Her premium is under $500/yr and here are some cash values at some important anniversary dates.

  • $8,000 when Sofia is ready to start college
  • $17,000 when she is 28 and getting engaged
  • $31,000 before she turns 40
  • $51,000 when she’s my age 47 (and the premium decreases to only $443/yr
  • $151,000 when she’s ready to retire (hopefully at 67 and I’m long gone)
  • $273,000 when she’s 80 and almost $400,000 in death benefit
  • Five important points to know about the 529 plans:

    1. You must disclose them on your child’s Financial Aid Forms. Not so with Life Insurance.

    2. If the child does not go to college, the growth on the money becomes taxable and subject to potential penalties when withdrawn or otherwise used by the parent(s) or grandparent(s). With fewer jobs waiting for college graduates more kids are skipping college altogether rather than get themselves into debt with Sallie Mae. The State Schools are the best option and the cash value in the Life Policy can help offset rent or books. If your kids are fortunate enough to get scholarships or if Mom and Dad have the financial resources to foot the bill, leaving the Life Insurance Policy untouched and in Place will pay off big later.

    3. The money in a 529 plan is subject to loss due to market risk. There are also scenarios where you CAN be taxed on the gains.
    I heard a story at dinner on Saturday about this.

    4. 529 plans are not “self completing,” should a parent or grandparent die prior to complete funding.
    In other words if you become permanently disabled a waiver of premium guarantee ensures that it completes the program even if you cannot.

    5. 529 plans have funding limits. Funding is limited by the $12,000 annual gift tax exclusion (although they can be super-funded in year one by pouring in the first five years’ worth of gifts all at once, totaling $60,000).

    Two other small factors here which will emphasize my position by way of anecdote from two of my closest friends, both with daughters.

    My first friend’s daughter is 18 and never had a policy. Her friends dared her to steal from a Walmart. She did, got arrested and now has a criminal record which affects her life insurance application for when SHE has kids. She was also caught in a car with kids smoking pot. Point is, lock in your child’s insurability BEFORE they do something stupid. How many stupid things have you done? Get my point?

    My second friend’s daughter recently survived falling out of a window and almost broke her neck. While we are all incredibly relieved that she is okay (frankly we are told it’s miraculous given the circumstances), had she broken her neck, she would most likely have been uninsurable. How many stories have I heard about kids getting hurt permanently just in little league this year.

    God help us, there’s only so much we can do. And one of those things is that I am taking the couple of hundred bucks a year to lock both my kids into life insurance plans which I’m hoping they wont need until after I’m gone. To be sure I want to get more insurance for both of them because who knows what will be waiting for them in their retirement years.

    I’m not taking any chances. Here’s a cute video to get you thinking. I would love to hear your comments and am available to discuss this vitally important subject with you.

    College Funding The Right Way - Life Insurance Over 529 Plans

    College Funding The Right Way - Life Insurance Over 529 Plans

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