In our previous post, Know "Living Life by Design": the Outer Appearance, investments in Living Life by Design (LLBD) have been summarily compared with 529 education plans. Here, in this post, we'll invite you take a deep dive into the comparison.
There are two types of 529 education plans: college saving plan and prepaid tuition plan.
Let's compare one after the other.
(1) LLBD vs. 529 College Saving Plan
529 college saving plan works pretty much like a Roth IRA that you put your after-tax contributions into available mutual funds or similar investments. You will have several investment options to choose. Your money in the 529 account will go up and down depending on the performance of the investment you choose.
For LLBD, you invest your after-tax money into a life insurance policy. The insurance company offers you an cash value growth following the index of S&P 500, Hang Seng, or Credit Suisse with a cap increase (current cap rate is 6.07%) and zero lock-down.
Zero lock-down means your invested money maintains the same value when the index of the stock market goes to negative values. In other words, your money won't shrink at the time when the stock market experiences crisis.
LLBD has a growth cap, and 529 college saving plan does not. Seems like the latter one is better?
We let the data speak.
Above is the index history of S&P 500. It's been going up and down throughout all the analysed years, and twice intense drops at year 2000 and year 2008.
Here are two cases with simple math: Case #1, you put $100 in the stock market, the first year market shrinks 10%, the second year market increases 10%, you'll have $99 ($100*0.9*1.1=$99) in the end. With LLBD 6.07% cap and zero lock-down, you'll have $106.07 ($100*1*1.0607=$106.07) instead. Case #2, you put $100 in the stock market, the first year market increases 10%, the second year market shrinks 10%, the third year market again increase 10%, you'll have $108.9 ($100*1.1*0.9*1.1=$108.9) in the end, but with LLBD you'll end to have $112.51 ($100*1.0607*1*1.0607=$112.51).
At both cases, LLBD offers you better investment return. Why?
Because, at any time your money shrinks, it needs more growth to return to the original value.
That is why we say LLBD offers "downside protection, upside potential".
Moreover, you'll know which side to stand if considering how the money in LLBD and 529 can be used for and how you can withdraw.
Money in 529 plan can only be used to pay for qualified education expenses, which includes tuition, fees, books, supplies, equipment, computers and dorm charges. You may withdraw the money for any other purposes BUT the growth portion will be subjected to ordinary income taxes AND a 10% tax penalty.
Look at LLBD, you can surrender your money for any purpose (tax free and no penalty) up to the limit of the cash value in your life insurance policy. Well, if you surrender the whole amount of your cash value, then your life insurance policy will lapse. But producers like us can help you find out how much you can be safely surrender.
So, in sum, generally speaking, the money grows faster in LLBD and has so many benefits in terms of how you'll use the money for.
(2) LLBD vs. 529 Prepaid Tuition Plan
529 prepaid tuition plan, by definition, means you prepay all or part of the tuition costs of an in-state public college education. The prepaid tuition may also be converted to use at out-of-state public colleges as well as private colleges. There's also a private college 529 plan that is sponsored by 250+ private colleges nationwide.
As was discussed in the other post: Know "Living Life by Design": the Outer Appearance, we know that the tuition of a in-state public college has a general trend of double the tuition in approximately ten years.
Let's again use the projected 2020-21 in-state tuition of University of Michigan as an example. The 2020-21 tuition is $15,948 for First-Years/Sophomores and $17,948 for Juniors/Seniors. That is a total tuition demand of $67,792 for a four-year college study.
Now, I utilize 529 pre-paid tuition plan and but the future tuition using the current rate, anticipating that the tuition will double every ten years. Then, the net growth, in the case of my 6-year-old boy, will be $67,792 at his college age.
Guess, how much return my 6-year-old boy can get if I put $67,792 into LLBD?
I open a LLBD with one million dollar death benefit. At the age of 19, the accumulated value (surrender value) will be $138,701, according to the current interest rate of 6.07%! Such return gets even larger when the investment is started at an earlier age. For example, the same money I put for my 4-year-old boy, the corresponding return at his age 19 will be $152,909!
Yes, the accumulated value in LLBD largely depends on the stock market, and it not guaranteed. But at least it will be a steady increase due to the feature of "downside protection, upside potential".
Here are two assisting aspects make me decide to invest the money in LLBD instead of 529 pre-paid tuition plan for my 6-year-old boy:
#1, Government news is reporting that there were $2.6 billion financial aid went unclaimed in the past school year, and this has been long observed over the past years as well, and so will be for future years. The reason why so much "free college money" went unclaimed is because 529 plan owners will have less priority to get this FREE financial aid, according to an article published at Savingforcollege.com. However, life insurance owners do not trigger such disadvantage. You may check the Financial Aid Eligibility.
#2, 529 pre-paid tuition plan only covers the future tuition cost, there're other big expenses (such as housing, food, books and fees) are excluded. That means, you still have to use your own money to pay those big expenses. Certainly, 529 college saving plan does cover these expenses. But you have to put more money aside to deal with this. Check again the 2020-21 undergraduate costs of University of Michigan, the other expenses contribute to nearly 50% of the total college costs.
SUMMARY
The LLBD investment stands out while comparing to either 529 plans.
And, don't forget, LLBD is a life insurance. It offers death benefit at the event of insured's death.
One more, LLBD embeds with living benefits of no additional charge. At events when the insured is diagnosed with critical illness, terminal illness, chronic illness, or involved in critical injury, up to 90% of the death benefit can be solved to meet the insured's family's financial needs.
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