IUL vs 529: Decoding the Best Approach to College Savings

Do you know the best saving method for your child’s college education? Suppose I could introduce you to a safer and more effective way to secure your child’s future while also ensuring a worry-free retirement. Would you be willing to spare just 5 minutes of your time to learn about it, especially in the context of IUL vs 529?


As we all know, college tuition fees continue to skyrocket each year. It is wise to start saving for your child’s education as early as possible, even from the moment they are born.


Many people believe they cannot afford to save for their child’s college education and keep delaying it, hoping that the situation will improve in the future when they earn more money. Before they realize it, their little ones are teenagers, and college is just a few years away. At that point, they are left with two options: either save aggressively or hope their children qualify for financial aid. In the worst-case scenario, they rely on their children’s ability to secure high-paying jobs after graduation to repay the significant amount of student loans they accumulated during college.

Is the 529 Plan the Optimal Solution to Save Money for College?

Saving for your child’s college education shouldn’t be such a daunting task.

Most people who save for their children’s education often choose a 529 college plan account. In this article, we would like to present an alternative approach that, when properly implemented, can be more advantageous.

The 529 Plan Has Several Pitfalls

1. 529 Plan Impact on Financial Aid

If you have a 529 college savings plan, the college will exhaust the funds in that account before considering any financial aid. Your hard-earned savings in the 529 plan will be completely depleted before you can say “college.” 

But what if there’s a plan that uses the financial aid first, and whatever is left to pay, you can use money from it?

2. What if Your Child Doesn’t Want to Go to College Anymore?

You’ve diligently saved money in a 529 plan for 17 or 18 years, envisioning your child following in your footsteps, attending the same prestigious university, obtaining a master’s degree, and working in the same corporate office as you. 

However, just months before receiving their high school diploma, they drop a bombshell and announce they no longer want to go to college. Instead, they want to pursue a career in art or any other field. They think their art will sell, and they will not need a college degree. 

While this may work for some, it will not for most. The parents, though, will be left with a significant amount of unused funds in their 529 college plan. In such cases, you would have to withdraw the money from the 529 plan, incur a 10% penalty, and pay income tax on the entire amount.

3. Market Volatility. What Will Happen to Your 529 Plan?

Imagine it’s 2008, your child is a senior in high school, and they’ve been accepted into the expensive university you had in mind for them. You’ve saved enough in the 529 plan to cover the first three years, and you planned to figure out the rest as time passed. But then, the 2008 market crash happens, and you suffer a 49% loss on all your 529 savings. 

Now, picture the predicament you find yourself in—sitting down with your child, breaking the news about the financial setback, and discussing their options. You may have to tell them to consider a more affordable alternative for college or, if they still want to attend their dream university, they will have to shoulder the burden of student loans entirely. It’s disheartening to feel that financial challenges have overshadowed your hard work and sacrifices.

You don’t feel that proud of all the good work you did and the sacrifices you made anymore, right? You feel cheated by life.

Consider Index Universal Life Insurance (IUL) as an Alternative to the 529 Plan


Let’s explore an alternative solution that addresses the pitfalls of a 529 college plan. 

Consider utilizing an Indexed Universal Life insurance (IUL) policy as a powerful saving vehicle for college. 


1. Index Universal Life Insurance and Financial Aid

Since IUL is an insurance product, it does not need to be disclosed in the financial aid applications. If your child qualifies for financial aid, they can access it first and then secure a zero-interest loan using the cash value from their IUL policy to fund their college education.

This loan will be repaid upon their passing in old age, ensuring that the cash value remains intact and continues to grow through compound returns throughout their lifetime. 

Not only will they have funds for college, but they will also accumulate significant savings for retirement.

2. What if Your Child Doesn’t Want to Go to College Anymore?

Let’s consider a scenario where your child decides to pursue their passion and forgo college. With a well-structured IUL policy in your name rather than your child’s, the funds will remain in the account until your child truly needs the funds. You can release the money to your child when they want to buy a house or plan a wedding or when you believe they have become financially responsible and won’t squander their retirement savings. 

This way, they can retire with a substantial cash value. By setting up the IUL policy with the child as an insured, not the owner, they won’t have access to the accumulated cash value during their “Picasso” phase. Ownership transfer will only occur once you are confident in their dependability and trustworthiness.

3. 2008 Market Crash Happens. What Will Happen With Your Iul?

Now, let’s tackle the third scenario. It’s 2008, the market has crashed, and everyone around you is in a state of panic, having lost over half of their savings. Yet, you remain calm and unaffected. Why? Because you didn’t lose any money. 

While the IUL policy may not experience growth during bear market cycles, it provides a safety net, ensuring your savings won’t decrease. The floor rate on the IUL policy worked in your favor. 

To structure an IUL for college education, your financial advisor must know how to structure it correctly for all of it to come into place just right for all of the above scenarios. Also, it has to be structured right, just in case one or both parents will pass away before you have transferred ownership to your son/daughter.

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Last updated: [8/17/2023]

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