Home > Life > 529 Plan for College Savings or Indexed Universal Life Insurance (IUL) - Which is Better?
529 Plan for College Savings or Indexed Universal Life Insurance (IUL) - Which is Better? A 529 plan for college savings is good, butindexed universal life insurance (IUL)may be better under certain conditions. Both are taxed much like a Roth, with contributions from after-tax dollars. Each has tax-deferred growth and may be able to provide tax-free distributions. Here are some differences: - 529 plan distributions must be used solely for education expenses, or else the gains be subject to ordinary income tax, plus a penalty. IUL funds are available tax-free for any purpose at any time, so long as they are taken out using participating policy loans.
- 529 plans have no provision to be self-completing in the event of death or disability of the parent doing the saving. IUL always pays a death benefit, and may be self-completing due to disability, assuming a waiver of specified premium rider is included.
- One of the challenges with saving for college is that your assets may factor into financial aid calculations. The more assets you have, the more your family is expected to contribute toward the costs of college. That usually means a reduced financial aid package. However, life insurance (including indexed universal life insurance) isn’t included in financial aid analysis, while assets in a 529 plan may be. That means you can use an IUL policy as a college funding vehicle without being concerned about how it will impact financial aid.
- A 529 plan is subject to tax and penalty if distributions are for colleges outside of the U.S.. IUL distributions have no such restrictions.
- Most 529 plan investments may suffer losses. The investment component of IUL will never suffer an investment loss, while still offering nearly unlimited upside potential.
- You are limited as to how much you may contribute to a 529 plan. IUL contributions are virtually unlimited, since they are limited only by the amount of insurance you can qualify for.
Funds in a 529 plan may grow more in the first 10 to 15 years than contributions to IUL. While IUL is front-loaded for expense charges, for many instances of 529 plans vs. IUL, IUL will compete with, or even outperform the investments of a 529 after that duration. Even when college comes sooner than 15 years, if one presumes the IUL serves more than the single purpose of college, such as later providing retirement for the parent, IUL may still look quite attractive. Also, the duration for education comparison should be until graduation of the last of your children to be benefited. To learn more,Contact us! (Back to IUL Table of Contents)  |
FAQs
A 529 plan is subject to tax and penalty if distributions are for colleges outside of the U.S.. IUL distributions have no such restrictions. Most 529 plan investments may suffer losses. The investment component of IUL will never suffer an investment loss, while still offering nearly unlimited upside potential.
Is a 529 plan better than the IUL? ›
IUL offers you better asset protection since you can apply for participating policy loans and withdraw your cash tax-free. However, with 529, you will only withdraw your funds without tax if you use them for education expenses. Failure to do this is subject to income tax plus a penalty.
Can I use my IUL to pay for college? ›
Cash built up in a IUL can be used ANY WAY the policy holder wishes. Pay for college, purchase a house, take a trip, all tax free using participating policy loans. If you do not use the 529 college plan for qualified college expenses, you will pay a 10% penalty and be subject to income taxes.
What is the bad side of IUL? ›
With an IUL, the amount of your premium isn't fixed—and it'll rise as you age. (Sorry to be the bearer of bad news, but older people have a higher chance of death.) That means you run the risk of having the life insurance policy lapse if the premiums get too high to be covered by your cash value or other savings.
Is a 529 college savings plan a good idea? ›
And when you pull the funds out, as long as they're used for qualified higher education expenses, there's no federal income tax on the distribution and often no state income tax. 529 accounts also receive some favorable treatment for financial aid purposes, so they're really a great way to save for college education.
Why not to buy an IUL? ›
Some of the drawbacks include caps on returns and no guarantees as to the premium amounts or market returns. An IUL insurance policy may be canceled if you stop paying premiums. IUL policies are generally best for those with large up-front investments who want options for a tax-free retirement.
Is there anything better than a 529 plan? ›
Some 529 alternatives include using a custodial account, Roth IRA or Coverdell Education Savings Account.
How soon can I take money out of my IUL? ›
You can take money from your IUL anytime, but fees and surrender charges may be associated with doing so. If you need to access the funds in your IUL policy, weighing the pros and cons of a withdrawal or a loan is essential. A withdrawal will reduce the cash value in your policy and may trigger surrender charges.
How much money can I put in a IUL? ›
There is no contribution limit on an IUL policy, unlike an IRA or 401(k).
Who is the IUL best for? ›
Aside from IUL death benefits, they aren't considered a preferred retirement savings option because they carry higher fees and premiums than other vehicles such as a 401(k). Typically, IUL policies are best for high-net-worth individuals who want to lower their taxable income.
Who should buy IUL insurance? It's ideal for wealthy clients planning their estate or seeking retirement income. It also suits cautious investors who want stock market growth without risk. Additionally, people who want to invest and have easy access to their money can benefit.
Is an IUL a good investment for a child? ›
Child-indexed universal life insurance (Child IUL) is a financial tool that offers a unique combination of life insurance coverage and investment opportunities for children. It provides a long-term savings strategy that can help secure their financial future and provide them with valuable benefits as they grow.
Why don't 97% of people use 529 college savings plans? ›
It's easy to see why Americans don't embrace 529 plans. They often have limited investment options, high fees, complicated rules and anxiety-producing investment risks. All that said, the plans may ultimately be worthwhile for most families, as long as parents choose carefully. Focusing on fees is crucial.
What is the downside to a 529 account? ›
If you use distributions from your 529 account to cover anything other than education costs, you will face a penalty. You will be able to withdraw your money from the account but will be responsible for income taxes on the earnings – federal, state, and county if applicable – as well as a 10% penalty fee.
Is a 529 plan better than an investment account? ›
529 Plans vs. Brokerage Accounts
A 529 plan is a tax-advantaged investment account designed specifically for education expenses. By contrast, a brokerage account is a general-purpose investment account with no specific tax benefits for education savings.
Are there any disadvantages to 529 plan? ›
The account owner of a 529 plan holds all of the legal power. They can change the beneficiary or liquidate the account (with penalty) at any time. This could be a disadvantage if the owner of your or your child's 529 plan has a change of heart about where to direct their investment.
What is the average return on an IUL? ›
With this type of life insurance, the interest rate at which the cash value grows is linked to the performance of a stock index, such as the S&P 500. While your policy won't lose value if the stock market doesn't perform well, annual returns will be capped at around 10% to 15% when the market is strong.
