10 Important Questions to Ask Before you Decide<
By Joan Marshall,
Executive Director, College Savings Plans of Maryland
April 23, 2013
For those of us who manage 529 college savings plans, this is a question that we hear from time to time – primarily when families see an ad (usually on TV) that promotes life insurance as a way to save for college.
In Maryland, we have responded to this question by creating a chart that compares our 529 prepaid tuition plan and our 529 savings plan with one of the popular life insurance products.
For residents of any state, however, below are 10 general questions that families should ask as they consider a life insurance product as a means to save for college. Broad responses to these questions for 529 plans are noted where relevant. However, I would encourage you to investigate the answers to these questions not only for life insurance but for specific 529 plans that you may be considering, or ask your financial advisor.
1. How would the life insurance policy work? Who would be insured – a parent or the child?
2. How much insurance coverage is appropriate? CSPN offers a “college cost calculator” that allows you to determine how much you need to save for college in a 529 plan based on a set of assumptions about the type of college you are saving for – public or private – the age of the child, etc. The websites of most 529 plans also offer versions of this calculator tailored to their plan(s).
3. Do I need life insurance coverage or would I be using it primarily to save for college?
4. What happens if I cancel the insurance coverage? How much of what I paid would be refunded?
5. Are there federal or state tax benefits for life insurance? With 529 plans, any earnings are tax free provided the funds are used for qualified higher education expenses. Many states also offer tax deductions or credits for contributions to a 529 plan.
6. How would I know how much I earned in a life insurance policy if I use it to pay for college? With nearly all 529 savings plans, you have the ability to access your account 24/7 and view the current amount of any earnings.
7. Can I make changes to my life insurance policy after I enroll?
8. Can I withdraw funds from my life insurance policy to pay for a financial emergency or other reason?
9. How can I get detailed information to decide whether to purchase a life insurance policy? You will need to contact the insurance company and ask. For 529 plans, I would encourage everyone to read the Plan Disclosure Statement for your selected Plan(s) that is on each Plan’s website. This Disclosure Statement contains all information that a potential investor should know before making a decision to invest in the Plan.
10. In order to open a life insurance policy, will I be asked questions regarding my health? Will I be required to provide consent for my physician to be contacted? Do I have to give consent for obtaining my credit and insurance claim history? OK, I admit I combined several questions into one category here, but make sure to review the specific life insurance application for answers to these questions. 529 plans do not require any of this information at any time.
So, be an educated consumer and ask these questions – and more – when considering how best to save for college for the children in your life! I know that CSPN members will be happy to assist you in learning about 529 plans, since we believe they are one of the most compelling ways to save for college. Simply select a Plan to learn more.
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