IUL or 529?

What’s the Best Way for a Parent to Save Money for Their Child’s College Education?

There are a variety of programs that offer tax benefits to help you save money for your kids college education. Some of them offer immediate tax deductions and income tax deferral and some don’t. Most require that the money be spent on educational expenses or there will be a tax penalty, or at least loss of the tax benefits. Most importantly, when the kid finishes school, the money is normally used up. I’m going to tell you now about one of the greatest financial tools you will ever see or hear about.

An IUL (indexed universal life insurance policy) for a child gives you the opportunity to leverage a small amount of after-tax money while your child IS a child into a LIFETIME of tax-free financial benefits. To maximize the benefits for college, the policy should be bought ASAP after the child’s birth. There is no medical exam needed; the child just needs to be born healthy. These policies are issued very quickly.

Obviously, the chances of a young child dying is very small, thus the cost of insurance is extremely low. Part of the money you pay into the program will cover this cost of insurance plus any fees, and the rest will go into the cash value account. Like any other IUL, the growth of the cash value will be tied to the growth of a stock market index that you will choose, most often the S&P 500. Please note that your account is not actually invested in the market, the growth rate is simply determined by the market.

When the index goes up, your account will earn interest. When the index goes down, you will be protected by a guaranteed floor of 0%. Your cash value can NEVER go down because of the market, making this a very safe place to put money. To pay for this floor, there will be a “cap” to how much of the market growth can be credited to your account. If the cap is 14% and the market goes up 10%, your account will earn 10%. If the market goes up 20%, you will earn 14%. If the market goes down, you will earn 0% and your cash value will stay the same. With a cap of 14%, your cash value will grow somewhere between 0 and 14% every year, after the cost of insurance has been deducted.

How does this work out? Assuming the market continues to grow at its 30 year average rate of 8.39% and you put just $100 a month into the account through age 18 (then STOP), you should have tax-free access to $10,000 a year for each of four years of college, PLUS a $50,000 tax-free distribution at age 35 (house down payment?), PLUS a tax-free distribution of $250,000 at age 55 (pay off or pay down the house?), PLUS tax-free annual distributions FOR LIFE of over $200,000 a year starting at age 67! On top of this, the death benefit will have gone up from $115,000 at issue to over $1.6 million at age 66, with no additional out of pocket cost.

These distributions are just illustrations and are not set in stone. There are a million variations on when and why you might take the tax-free distributions. We assume that the parent (or a grandparent) will buy the insurance for the kid and will own the policy until they believe the child is ready to take over ownership of the policy.

Can you deposit more than $100 a month into one of these polcies? Yes, to a limit.

Does the child have to be an infant? No, but to maximize the growth, should be as young as possible.

Is the growth guaranteed? No, it will depend on the growth of the index tied to the account.

Are there any other catches? Yes. Two people –  parents or grandparents –  must have a life insurance policy with the same company. It can be a term policy, whole life, or IUL.

Any other questions?

 

Michael Goodman

Life Insurance Agent, Santa Clarita, CA

 

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2 Responses to IUL or 529?

  1. Shawna says:

    “Two people – parents or grandparents – must have a life insurance policy with the same company. It can be a term policy, whole life, or IUL.” Do the adults buying for children under 18 has to have a life insurance from the same company or as long as they have one? Does the amount of the life insurance benefit depends on the adults’? Thanks

    • Michael Goodman says:

      The parents or grandparents do need to have a policy with the same company, for double the size of the child’s policy. The child’s policy is limited to $250,000. These child IUL’s are written with the lowest legal amount of death benefit to ensure that you get the highest amount credited to the cash value. However, as the cash value grows, so does the death benefit. This is why I pointed out that, in my example, the death benefit rises from $115,000 at issue to over $1.6 million at age 67.

      Thank you for the question!

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