Robert Cheney of Westridge Wealth Strategies in Portola Valley, California, who can count many physicians and dentists as clients, has a college-savings strategy appropriate for some small business owners: a group insurance executive benefit program known as Section 79. "Briefly," he says, Section 79 "is a group insurance program that can buy into cash value life insurance." He points out that with taxes on unearned compensation due to rise, the tax benefits of putting money into a policy will be significant. This benefit can only be used by C corporations, but he explains that it "gives that business owner a partial deduction on funds going into the plan on premium payments. Then those funds within the insurance policy grow tax deferred, and you can borrow against the policy and it's not considered taxable income." In California, where he practices, there's no state tax deduction for a 529, so this is a way to get a tax deduction up front; clients can also put "substantially more money into this vehicle than the $13,000 allowed without gift taxes, and then can get tax-deferred growth and tax-free distribution just like a 529 plan."
Section 79 also protects assets, a major consideration particularly for those physicians and dentists, and he adds that there's more control over the investments than there is with a 529, a major objection of many planners. The money borrowed from the plan can be used for any purpose, not just education, and for anyone, not just a student. "You need a business owner still earning money in this environment," Cheney points out, and reiterates, "and they have to have a C corporation. But it's a fantastic tool. You have life insurance coverage the whole while, so there are a bunch of different financial planning objectives achieved there."
Regarding life insurance in general, Joe Hurley of www.savingforcollege.com says, "Some advisors are wondering about life insurance as a college savings vehicle since it has been promoted for many years as a vehicle that does not impact financial aid chances. I don't know of any in-depth comparisons, but generally advise that the costs be fully understood since life insurance entails added costs, and some added restrictions."