Do you need life insurance coverage for your 529 plan?

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Mark Kantrowitz

By Mark Kantrowitz

August 21, 2018

There are several reasons why a family might want to get life insurance coverage when starting a 529 college savings plan, such as providing peace of mind and protecting family finances from unforeseen events. A term life insurance policy is sometimes necessary to protect a 529 college savings plan account.

The primary purpose of a life insurance policy, such as a term life insurance policy, is to provide income replacement in case a wage-earner dies.

Typically, families obtain or increase a term life insurance policy at major life-cycle events, such as when a wage-earner gets married or has children. Before then, there is no spouse or children who are dependent on the wage-earner’s income. Often, starting a 529 plan is a reminder that the parents may need to obtain or increase their life insurance coverage.

It is also cheaper to get a term life insurance policy when the insured is younger and healthier.

Most people choose a term that provides coverage until the children graduate from college. Some people choose to have coverage through normal retirement age.

The face value of the policy should be 15 to 24 times current income, depending on the age of the insured and the term of the life insurance policy. This should be sufficient to cover the cost of an annuity that replaces the lost income.

Some families further increase the face value of the policy to provide enough money to fully fund their children’s 529 college savings plans and to pay off the mortgage on the family home. This provides the insured with peace of mind, knowing that their family will be taken care of in the event of their passing.

If a family does not have life insurance coverage, it places the 529 plan funds at risk. If the surviving spouse encounters financial difficulty, they may be forced to take a non-qualified distribution from the 529 plan to pay their bills. Even if the surviving parent does not have to use the 529 plan funds to pay for everyday expenses, their financial situation may force them to limit or eliminate future contributions to the 529 plan.

A good place to start:

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