Paying for college is tough unless you start saving early. No one wants their child to begin adult life burdened with overwhelming debt. But what's the best way to help them? Which type of college saving program stretches your dollars furthest?
Let's take a look at two popular options, and compare them to life insurance...a lesser-known option that often works better than either of the two more popular solutions.
The Difference between Coverdells and 529s
Like 529 plans, Coverdells let you put away money that grows tax-deferred until you need to pull that money out for your child's educational expenses. Unlike 529s, Coverdells can be tapped before your child goes to college. You can use them to help cover expenses in elementary school all the way through college. This is a big help for parents looking to send their kids to private high schools.
However, there are a few big drawbacks to the Coverdell account:
*Contribution limits. You can only contribute $2,000 per year to each account. Now, that's not very much if you're looking to build a supply of funds to pay for a 4-year education in 10 years. You won't see a ceiling this low with a 529 plan (or with permanent life insurance).
*Age limits. You can only contribute until your child is age 18. That's bad news for many parents and students, since fewer kids leave the nest right away. Here's an example:
- Let's say your student graduates high school at age 18 and decides to live at home and go to community college for 2 years to save money. The plan is to transfer to a four-year institution later to complete their degree. But with a Coverdell, since your student is already 18, you can't keep contributing to their account...even though the most expensive part of their education is still ahead of them.
*Lack of control. If your child doesn't go to college, the money in the Coverdell account will still be distributed to them. You can't get a refund and use that money for other things (such as your own retirement). This isn't the case with a 529 plan.
*Financial aid asset status. Like a 529, a Coverdell account is considered an asset that has to be counted when your student is applying for financial aid. This may hurt their chances of qualifying for need-based awards.
How about Permanent Life Insurance?
If you're looking for things like flexibility and control, both 529s and Coverdells take that away from you, to an extent. As a licensed financial advisor, I recommend permanent life insurance instead. It's the only option that gives you back everything you lose with a Coverdell.
*Higher contribution limits + improved financial aid status. You're definitely not limited to $2,000 per year. Many families looking to reduce the amount of their assets for financial aid applications sock away extra money in their life insurance policy. That money grows tax-deferred, earning more for your child's education, as well as reducing your overall assets for things like a FAFSA application.
*No age limits. Because life insurance cash value has no limitations on age or uses, your family is free to make their own choices. If your child doesn't go to college until age 27, that money will still be there, earning interest the whole time.
*Ultimate control. Because the cash value is in your name, you control how much you take out, who receives it, and how they spend it. There are no "educational expenses only" rules. There are no limits at all. Here's just one example of what you can do:
- If your child never goes to college, you can use that cash value to supplement your own retirement funds. Or make a down payment on your dream house. It's all up to you. No rules, no regulations, no micromanagement dictating the kinds of choices your kids need to make to get maximum use of your money.
Of course, the number one reason to buy a policy is to provide your loved ones with peace of mind and financial security. Don't lose sight of this fact while you're looking for ways to help pay for the kids' college education. Life insurance gives your family peace of mind, as well as more potential benefits than a Coverdell account.