- While cash values can be borrowed tax-free as a policy loan, if the policy lapses, a taxable event may occur for the borrower.
- If the Whole Life is a Modified Endowment Contract (MEC), the loans or withdrawals may be subject to tax at the time distribution is taken, plus an additional federal tax penalty depending on the borrower's age.
Who May Benefit From Whole Life As a 529 Plan Alternative the Most?
Although Whole Life insurance does provide additional benefits, there may be situations where it may not be appropriate. If not put in place when the child is young, the life insurance policy may not build enough cash value to properly cover college expenses. Also, when using whole life insurance for college planning, the use of the optional Additional Paid-Up (API) rider can supplement the early build-up of cash values. Without the API rider, the policy may not build up cash value quick enough to provide sufficient funding for college when the owner needs it.
The Bottom Line
The additional benefits whole life insurance provides, together with the tax-preferred access to cash values, make it a valuable tool for college funding. Whole Life insurance can play a key in a young family's college planning, whether it is stand alone or alongside a 529 plan.
In our next blog post, we will wrap up our 529 plan vs. Whole Life comparison discussion with a table summarizing the key differences between 529 Plan and Whole Life for college fundings.