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State-run 529 plans are kinda like those Roth 401(k)s or Roth IRAs, but they’re all about helping you save up for education, not retirement. With a 529 savings plan, you can put your money into a bunch of different mutual funds, and any profits you make won’t get taxed until you take the money out. As long as you use that cash for stuff the IRS says is related to education, you won’t have to pay any taxes on it when you withdraw it. SOURCE
Now, here’s the cool part: many states offer an extra incentive to encourage saving for college by providing a state tax deduction or credit when you contribute to their 529 plans. It’s a nice little bonus that can make your contributions go further.
The federal government doesn’t offer any immediate tax breaks for the money you put into a 529 plan. So while you might get a state-level benefit, don’t expect Uncle Sam to chip in.
The good news? A 529 plan isn’t your only option for tax-advantaged college savings. Another strategy worth considering is purchasing a permanent life insurance policy. Unlike term life insurance, which only provides coverage for a set period, permanent life insurance includes a cash value component that grows over time—and it does so on a tax-deferred basis. In some cases, you can even access this cash value tax-free, making it a flexible tool for long-term financial planning, including education expenses.
When it comes to picking the right kind of permanent life insurance, “participating whole life insurance” is the safe choice. Other types of permanent life insurance are too risky to depend on. (Link to Types of Life Insurance Video Here)
To help visualize how participating whole life insurance works, let’s think of buying a house. As you make payments on your house you develop equity in it that can be accessed when you sell the home or take a home equity line of credit on it. Something similar happens when you purchase a participating whole life insurance policy.
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When you pay the premium on a participating whole life insurance policy, you’re securing a death benefit and building a cash value component that grows over time. This cash value belongs to you, the policy owner, and can be accessed whenever needed, offering a degree of financial flexibility that many other savings vehicles don’t provide.
One of the advantages of participating whole life insurance is that the life insurance company guarantees your cash value will grow by a set amount each year. On top of that, if the company performs well—especially in terms of its investments—you may receive additional value in the form of annual dividend payments. These dividends aren’t guaranteed, but many well-established mutual insurance companies have a strong track record of paying them consistently.
Just like the funds in a 529 plan, the money inside your whole life policy grows on a tax-deferred basis. If managed properly, it can grow entirely tax-free. When it’s time to cover college expenses, you have a couple of options: you can either take a direct withdrawal from the policy’s cash value, or take out a policy loan against it. Loans don’t trigger taxes, but they do need to be repaid eventually—otherwise, the insurance company will reduce your policy’s death benefit by the outstanding loan amount. Either approach gives you access to funds when you need them most, without the same restrictions or penalties often associated with traditional education savings accounts.
Let’s compare life insurance to a 529 plan, and see why life insurance has a couple of perks.
First, let’s talk about flexibility—something every parent appreciates, especially when planning for an unpredictable future. Imagine this scenario: your child decides that college isn’t the right path for them. Maybe they want to start a business, pursue a trade, or take another route. If your savings are tied up in a 529 plan, accessing those funds for non-qualified expenses can get expensive. You’ll likely have to pay ordinary income tax on the earnings, plus a 10% penalty. That’s a steep price to pay just for wanting to use your own money a little differently.
Yes, in some cases the student—who’s often in a lower tax bracket—can take the distribution to reduce the tax burden, but the 10% penalty still applies unless the withdrawal qualifies for an exception. It’s not an ideal situation and can limit your flexibility at the worst time.
Now compare that to a participating whole life insurance policy. With this kind of policy, the cash value you accumulate isn’t locked into a specific purpose or person. You’re free to use the funds however you see fit—whether it’s for college tuition, starting a business, buying a home, or even funding your own retirement. And because the money can be accessed through policy loans or tax-advantaged withdrawals, you avoid the surprise tax bills and penalties that can come with dipping into a 529 plan for non-qualified expenses.
Now, here’s the other good part about life insurance: it doesn’t mess with your chances of getting financial aid. But a 529 plan can. You see, the money in a 529 plan is considered a parental asset, and they count a chunk of it, up to 5.64%, when they calculate how much you’re expected to contribute to your kid’s college costs. So, if you want to keep your financial aid options wide open, life insurance might be the way to go. (Resource)
If you’re considering using a participating whole life insurance policy to fully fund college tuition, it’s important to understand that the policy needs to be properly capitalized. In other words, you’ll need to commit to funding it consistently over time to build up enough cash value. This requirement isn’t unique to life insurance—529 plans also rely on regular contributions to grow effectively. One key distinction is that the full range of benefits offered by a participating whole life policy isn’t realized until the policy has matured and its cash value has grown beyond the total premiums paid. For most policies, this breakeven point usually occurs around 10 to 15 years after inception.
That may seem like a long time, but here’s where participating whole life insurance stands out. One of its greatest—yet often overlooked—advantages is its long-term utility. Even if you get a late start in funding the policy and don’t fully capitalize it in time to cover all of your child’s college expenses, the policy doesn’t stop being useful once your child is done with school. In fact, the same cash value can continue to grow and be used for a variety of future financial needs. It can help fund a wedding, a down payment on a first home, or even serve as a source of tax-advantaged income during retirement.
Unlike education-specific savings vehicles, a whole life insurance policy is a lifelong financial tool that offers flexibility, stability, and tax benefits—well beyond the college years.
The biggest advantage of a 529 plan is its favorable tax treatment. Here’s how it works: when you contribute to a 529 plan, your money is invested in a selection of mutual funds or other investment options. As those investments grow, the earnings aren’t taxed each year, which allows the account to potentially grow faster over time. And when it’s time to use the funds, as long as you withdraw the money for qualified education expenses—like tuition, books, or even certain room and board costs—you won’t owe any federal taxes on those withdrawals. It’s a powerful way to save for college with some meaningful tax perks.
There’s a catch that often surprises families: 529 plan balances are considered assets when applying for financial aid through the Free Application for Federal Student Aid (FAFSA). This means the money you’ve saved in a 529 plan could reduce the amount of need-based financial aid your student is eligible to receive. While the impact may be moderate for some families, for others, it could make a big difference—especially when it comes to grants or subsidized loans.
Now let’s compare that to how a participating whole life insurance policy works. One benefit of using life insurance to save for college is how it’s treated during the financial aid process. The cash value you’ve built up inside a life insurance policy isn’t considered an asset on the FAFSA. Because of this, it won’t reduce your eligibility for need-based financial aid. That makes it an appealing option for families who want to save aggressively without jeopardizing their child’s access to grants, scholarships, or income-based financial aid packages.
In short, while 529 plans offer strong tax incentives, they may come with trade-offs in terms of financial aid eligibility. Whole life insurance, on the other hand, offers a more discreet way to build savings that can be used for college and beyond—without showing up on financial aid applications.
When it comes to planning for something as important—and as expensive—as a college education, there’s no one-size-fits-all solution. Everyone’s financial situation, goals, and timeline are different. That’s why the best course of action is to consult with a qualified financial expert who can help you evaluate all your options and create a personalized strategy that aligns with your long-term objectives.
If you’re curious about how participating whole life insurance can play a role in your college savings plan—or if you’d like a policy tailored specifically to your needs—we’re here to help. Our team can walk you through the ins and outs, answer your questions, and design a plan that makes sense for both your present and future. Reach out to us today. We’d be happy to support you on your journey toward building a secure financial future for your family.
by Jesse McFie
I have worked hard and saved from an early age. In 2018, my brother and I started our own welding and fabrication business and grew it to a full-time company. As taxes, fees and inflation ate away at my hard-earned income and savings, I quickly realized that the financial system in America is not designed to help you get ahead. Using participating whole life insurance and the principles we teach at McFie Insurance has helped me get ahead financially. I’ve used my life insurance policies to expand our business, debt free, to purchase equipment, and save for a piece of property. I love sharing with others how they can do the same.
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