Retirement Planning

Life Insurance Can Balance Retirement and College Savings Goals

Parents face a tough choice: Save for their children’s college education or save for retirement. Fortunately, this is not an either/or situation, because there are strategies that allow parents to save for both needs simultaneously, as pointed out in a recent blog post. One important and often overlooked tool for achieving this is permanent life insurance.

Permanent life insurance is not necessarily a replacement for strategies such as saving in a 529 plan for college or in an IRA or 401(k) for retirement, but it can be a valuable supplement. Here are five reasons why permanent life insurance can play a role in saving for both college and retirement.

Life insurance offers death benefit protection

First and foremost, life insurance provides death benefit protection. The death of a spouse or partner in the household will put any plans about college or retirement in serious jeopardy. However, if adequate life insurance is in place, the tax-free death benefit can be used by the surviving spouse to help fund their children’s college education or help achieve their own retirement goals.

Permanent life insurance provides tax-advantaged cash value accumulation

When most people think about life insurance, they think only about death benefit protection. The truth is, permanent life insurance provides so much more. When properly structured, permanent life insurance can provide tax-deferred cash value accumulation, and tax-free access to that cash value—at any time, for any reason.

While 401(k) and 529 plans are also tax-advantaged, 401(k) plans are only tax-deferred, meaning that eventually you will be paying taxes as you make withdrawals. Withdrawals from 529 plans are tax-free only if they are used for allowable educational expenses.

Permanent life insurance offers flexibility to help achieve a wide range of goals

Unlike 401(k) plans and 529 plans, life insurance is more flexible and can help you achieve more than one goal. 401(k) plans are intended for retirement only, and 529 plans are intended for college only—and both come with a lot of restrictions. For example, money in a 401(k) plan is locked up until you turn 59 ½, and early withdrawals can impose a tax penalty unless you have an approved reason for making a withdrawal. Similarly, if your plans change with a 529 plan—such as your child chooses not to go to college or gets a full-ride scholarship—you could incur a tax penalty if you want to use the money in your 529 plan for non-educational purposes.

Making withdrawals from permanent life insurance, on the other hand, has no such restrictions. You can use your cash value to pay for college, start a business, cover emergency expenses, fund your retirement or achieve any other goal.

Many permanent life insurance products offer protection from market volatility

529 and 401(k) plans are often times heavily invested in the stock market—which means that your returns will fluctuate as the market swings up and down over time. If the stock market takes a downturn shortly before college or retirement, the money you were relying on may not be there.

Whole life insurance is not correlated to the market so your cash value will not fluctuate with changes in the market. On the other hand, indexed universal life insurance offers market-based growth with downside protection. Your policy will be credited interest as the market grows, and also be protected if the market incurs a downturn. This means your policy will not lose money due to the market even if the market performs negatively. And, your policy growth is locked in, which can have a compounded effect on future growth.

You are not required to take withdrawals from your life insurance policy

Unlike 401(k) plans that force you to take Required Minimum Distributions after the age of 70 ½, life insurance does not require you to take withdrawals from your policy—ever. You are free to leave your cash value in place so it can continue to accumulate over time. This makes life insurance an excellent vehicle for leaving a legacy for future generations.

Saving for college or for retirement is not an either/or sort of thing, where saving for one means you have to forego saving for the other. Life insurance can be used as a vehicle for saving for both at the same time. Your financial professional has tools that can help you better understand how permanent life insurance can fit your personal financial needs.

This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.

Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values.

Any reference to the taxation of life insurance products in this material is based on Penn Mutual’s understanding of current tax laws.


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