How Indexed Universal Life Insurance Works? | Tax Free Retirement Series


There are two types of 529 Plans, Prepaid Tuition Plans and 529 Savings Plans. Prepaid Tuition Plans lock in the future cost of tuition in today’s dollars. Because the cost of tuition is increasing faster than the rate of inflation, the rate of return on these plans is generally greater than that of guaranteed instruments such as bonds or CDs. However, you are also locked into attending that specific school.

529 college savings plans, however, allow you to attend any school, but the funds must be used for education. A 529 plan lets you save money for college in an individual investment account that offers federal tax advantages. You (or anyone else) can open an account in your child’s name and thereafter contribute as much money as you wish, subject to the plan’s limit (but watch for gift tax rules).

Risk – When you open a 529 plan, you are investing in the market and are taking on all the risk of the market volatility. The returns are not guaranteed, and you may lose the principal that you’ve invested.

Growth – Since you are taking on the investment risk you have the ability to capture the market return, allowing the account to grow. However, you will also capture the market losses, which can have a significant effect on funding your goals.

Fees – Your 529 account will have advisor fees and investment expenses that could range from.15% – 2% or more. Check with the specific state plan in their official statement to learn more.

Taxation – The benefit of a 529 savings plan is that the earnings on your savings will grow tax-free if the withdrawals are used to pay the beneficiary’s qualified education expenses. However, if a withdrawal isn’t used to pay the beneficiary’s qualified education expenses (known as a nonqualified withdrawal), the earnings portion is subject to a 10 percent federal penalty and is taxed as income at the rate of the person who receives the withdrawal (a state penalty may also apply).

The Cons-

Indexed Universal Life Insurance

Indexed universal life insurance (IUL) is a type of permanent, cash value life insurance. Like universal life insurance (UL), IUL offers you the ability to change your level of protection, premium amounts, and payment frequency. An indexed universal life insurance policy offers growth inside the cash value account of the policy with participation in the market through an equity indexed account. IUL’s typically guarantee the principal amount, but cap the amount of return that can be earned (often up to 15%).

As the cash value grows, you can borrow against it tax-free to fund college (or any long-term expense such as retirement) to create tax-free income.

Risk – In an IUL policy, you are transferring the market risk to the insurance company. In exchange for not taking the risk, you give up some of the return.

Growth – The account participates in the growth of a market index such as the S&P 500, however the it is capped. This is a benefit of the IUL, having a guarantee of the principal in a downturn and participation of the market on the upside.

Fees – The IULs are usually not very expensive and are safer than an average variable universal life insurance policy. The fees cover the cost of the insurance and other living benefits (and some have living benefits such as withdrawal riders and terminal illness benefits).

Taxation – The increase in the cash value account grows tax-deferred. If the cash value is withdrawn, the earnings would be taxable, however most policy holders borrow the funds or use an income benefit rider which creates tax-free income and withdrawals.

Other Benefits-

The Cons-

Angie M. Grainger, CPA/PFS, CFP(r), Certified Money Coach President at RETHINK Money Coaching, Inc. Helping people master their money so they use it to transition into their NEW desired ideal life.Go to

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