A surprising alternative to education funding

A surprising alternative to education funding

You’ve probably heard of a 529 plan when it comes to saving for your child’s college education. It’s the most recognizable vehicle for college savings because of its favorable tax treatment for qualified education expenses, as well as a state tax deduction in some states. But it’s not the only option available to you.

A permanent life insurance policy can help you accomplish your college savings goals the same way a 529 plan can. But there are differences between the two that might make whole life insurance a more suitable option for you.

Take income tax-free loans1 

You can use the built up cash value in your policy to take out loans tax-free to help pay for college expenses (or other uses) without having to worry whether they’re qualified education expenses or not.

Get guarantees without market volatility

A 529 plan likely has funds tied to market returns. While that can allow your college fund to grow over time, a down market could significantly affect what you can afford when you have a need for the funds.

Timing is everything. Imagine a market downturn occurring right before your student’s freshman year.

Certain permanent life insurance policies offer you protection from market downturns. Whole life insurance provides you with guaranteed premiums, death benefit and cash value that won’t decrease based on financial market performance. Any dividends paid can be used to enhance your policy's cash values and death benefit if used to additional paid-up insurance (known as paid-up additions).

Certain universal life insurance policies also provide protection against market downturns with a declared interest rate that builds cash value in the policy. Unlike whole life insurance, universal life insurance gives you the opportunity to stay flexible with adjustable premiums.

Have options in case of disability

What if you became disabled while trying to build up savings for that college education? With whole life, you have an optional waiver of premium rider to guarantee your college funding stays on track.

Savings that may not affect financial aid considerations

FAFSA® financial aid guidelines currently don’t count your life insurance policy’s cash value as an asset, which means you could qualify for a higher level of aid. A 529 plan is considered an asset by FAFSA.
Note: Some colleges do view life insurance as an asset in determining financial aid.

Fund an education should the unthinkable happen

Unlike a 529 plan, life insurance provides an income tax-free death benefit to your named beneficiary which could fund an education.

Sometimes there are better solutions

There may be situations where whole life insurance won’t work for you. It’s best to use whole life as a college savings option when the child is young. That way your policy can build enough cash value to help properly cover college expenses. You can use what’s called an optional paid-up additions rider to significantly add to the early build-up of cash values in your policy. But if that first tuition bill is coming up soon, whole life insurance may not be the solution for you.

Compare to see if using permanent life insurance is a college savings solution for you and then talk to your financial professional.

Permanent life vs. 529 plan

Permanent life insurance 529 plan
Potential deductible contributions No Via state tax in some states
Tax-free access to cash Via policy loan as long as the policy stays in force If for qualified education expense
Not subject to market risk Yes2 No
Optional disability waiver rider Yes No
May affect financial aid amount No Yes3
Death benefit Yes No

1 Distributions, for any purpose, are not taxed under current law, provided the policy avoids Modified Endowment Contract (MEC) status and the policy remains in force.

2 When utilizing whole life insurance and current assumption universal life insurance policies.

3 Applicable if owned by parents. 529 plans owned by grandparents/third parties generally do not affect financial aid or beneficiaries under current guidelines.

FAFSA is a registered trademark of the U.S. Department of Education.

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Life insurance is issued by The Ohio National Life Insurance Company and Ohio National Life Assurance Corporation. Guarantees are based on the claims-paying ability of the issuer. Loans and withdrawals may reduce the death benefit, cash surrender value and any living benefit amount.

Products, product features, and rider availability vary by state. Issuer not licensed to conduct business in NY.

If tax-free loans are taken and the policy lapses, a taxable event may occur. Loans and withdrawals from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the loan or withdrawal is taken and, if taken prior to age 59½, a 10 percent federal tax penalty may apply. Withdrawals and loans reduce the death benefit and cash surrender value. 

Optional riders may be purchased for an additional cost.

This provides general information that should not be construed as specific legal or tax advice nor the law of any particular state.  Please seek the advice of a qualified legal or tax professional for your specific situation.

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