Just say no to life insurance being pitched as college savings

Theo Thimou | May 8th, 2018

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If you have kids and you’re saving for their college, there’s a salesperson trying to separate you from your money.

Life insurance as a way to save for college?

They say what’s old becomes new again. Lately, we here at Clark.com have been hearing an oldie resurface: Parents are getting pitches about whole life insurance for their infants.

One of the most popular pitches of all — the Gerber Life Grow-Up Plan — is now hitting mail boxes as an insert in the RedPlum coupon circular.

In years past, whole life insurance was pushed on parents as a great way to save for their child’s future college education.

The idea is you buy a policy on your child and then they’ve got life insurance down the road in the event of their premature death. When they make it to college age, there’s this wonderful tax loophole that allows you to borrow from the policy’s cash value to pay for college.

But Clark says the idea stinks and there’s a much better way to get the job done. It’s called a 529 plan (aka college-savings plans) and it has definite benefits over a life insurance policy to pay for college.

From a tax angle, every penny you save in a 529 plan is tax free when spent on eligible college expenses such as tuition, books and fees. A life insurance policy, by contrast, is only tax advantaged.

‘In my book, tax free beats tax advantaged seven days a week!’ the consumer champ says.

Which is more cost effective? Again, the 529 plan wins. The embedded costs in life insurance policies can be massive because they’re padded with commissions for the salesperson.

Worse still, consider this: If you can’t pay the premiums on a life insurance policy, the policy lapses and you’re wiped out. There’s no money there to tap for college.

With a 529 plan, however, if you hit a rough patch and can’t contribute any longer, the contributions you’ve made to date remain to grow and be spent tax free at the time of college.

‘Just be sure to buy 529 plans direct, not through a commissioned salesperson,’ Clark says. ‘If you need help getting started, check out my 529 guide.’

This post was last modified on May 8, 2018 11:59 am