Case Study: Using an Indexed Universal Life (IUL) Policy for College Funding
A New Year's Gift: Securing a Bright Future for Baby Mia
Background
As the clock struck midnight on January 1st, 2025, John and Emily welcomed their first child, Mia, into the world. Overwhelmed with joy and a sense of responsibility, they immediately began thinking about Mia's future, particularly her education. With college tuition costs rising each year, John and Emily wanted a smart and flexible way to save for Mia's college expenses.
After consulting with their Watermark agent they discovered an alternative to the traditional 529 plan: an Indexed Universal Life (IUL) policy. Intrigued by the potential benefits, they decided to explore how an IUL could serve as a financial vehicle for Mia's college funding.
Why Choose an IUL Over a 529 Plan?
John and Emily learned that an IUL policy offers several advantages over a 529 plan:
Flexibility in Use: Unlike a 529 plan, which is limited to educational expenses, an IUL policy provides greater flexibility. Funds can be used for any purpose, not just tuition.
Tax-Free Loans: The cash value accumulated in an IUL policy can be accessed through tax-free loans, providing a potentially tax-efficient way to fund college expenses.
Protection from Market Volatility: An IUL policy credits interest based on the performance of a market index, offering growth potential with downside protection. This means that while the policy’s cash value can increase with the market, it is shielded from market downturns.
Additional Benefits: An IUL policy also includes a critical illness rider, which can provide financial security for the family in the event of needing to access cash for an unforeseen event for Mia.
Implementation
In January 2025, John and Emily purchased an IUL policy with a monthly premium of $500. They planned to contribute consistently over the next 18 years, building up the cash value to help fund Mia’s college education.
Their Watermark Agent projected that by the time Mia turned 18, the IUL policy could accumulate a substantial cash value. This projection assumed moderate market performance and took into account the policy’s fees and costs.
Outcome
Fast forward to 2043, Mia is ready to attend college. The IUL policy has accumulated a cash value of $150,000. John and Emily decided to take a series of tax-free loans from the policy to cover Mia's tuition, room, and board, without the restrictions imposed by a 529 plan.
Additionally, because they were able to access these funds tax-free, they avoided the potential tax implications and penalties that could arise from withdrawing funds from other types of investment accounts.
Conclusion
John and Emily's decision to fund an IUL policy provided them with a versatile and secure way to prepare for Mia’s college expenses. The flexibility to use the funds as needed, combined with the tax advantages and protection from market volatility, made the IUL a prudent choice.
For parents like John and Emily, an IUL policy can be a valuable part of a comprehensive financial plan, offering a unique combination of growth potential, financial protection, and flexibility to meet future educational needs.