financial education

Reviewed by JeFreda R. Brown

Southwest Airlines Co. (LUV) has become a staple of travel for consumers within the United States. While many other airlines boast more accommodating features and more lavish upgrades, Southwest Airlines has stuck to a business model of shorter, cheaper flights that cater to consumers looking for quick and painless flight plans.

While Southwest Airlines has become synonymous with airline travel, there are quite a few things that most consumers don’t know about the company. Find out about four things that every consumer should know about Southwest Airlines.

Key Takeaways

• In 1972, Southwest Airlines found itself with only three airplanes and a schedule that required four airplanes, a situation that meant the company needed to implement a quick turnaround in order to make its schedules work.
• Southwest Airlines focuses on operational efficiency and logistics as one of its core differentiators, catering to U.S. consumers who want quick, low-cost flights.
• For the first nine years of its operations, the airline operated as a commuter airline with only three destinations in Texas: Dallas, Houston, and San Antonio.
• Southwest was one of the first airlines to offer consumers a website, an online booking tool, and access to coupons and discounts directly from the airline.
• When Southwest Airlines first launched, it had implemented a love-themed marketing campaign, which then became the origin of its LUV ticker symbol.

1. Southwest’s Efficient Operations Stem From Failure

One of the amazing things about Southwest Airlines is the efficiency of its operations. Known to have a great gate-to-gate turnaround time and consistent on-time logistics, it’s interesting to note that its quick turnaround time was born out of failure.

Back in 1972, when the airline was getting off the ground, it had to sell one of its four Boeing 737s to make payroll and remain in business. In spite of selling a quarter of its aircraft, Southwest remained focused on maintaining its four-aircraft schedule. To handle the demand of a four-aircraft schedule with only three planes, Southwest Airlines implemented a 10-minute turnaround to make the schedule work.

Southwest Airlines keeps that operational efficiency as one of its core differentiators to this day, continuing to implement a quick turnaround so consumers can get from point A to point B as quickly as possible.

2. Southwest Only Had Three Destinations for Its First Nine Years of Operations

While Southwest Airlines can take a consumer all over the U.S. today, this wasn’t always the case. Back in 1966, a group of Texas investors decided to buck the traditional airline industry and provide consumers with a commuter airline option.

The company was started with $500,000 in venture capital. Its founders envisioned it as an airline for Texas commuters between Dallas, Houston, and San Antonio.

Due to the nature of the business model, Southwest Airlines instituted a no-frills approach to flying. Instead of trying to be everywhere at the expense of efficiency, Southwest Airlines instead focused on becoming excellent in the cities it serviced.

As competition and profits grew, Southwest finally made the decision to expand in 1975, growing into the dominant airline consumers know today.

3. Southwest Airlines Has Been a Pioneer of Technology That Helps Consumers

Southwest Airlines is more than a pioneer in commuter-focused airline travel. Southwest was also one of the first airlines to introduce a website as well as an online booking tool.

In 1995, Southwest Airlines launched its first display website, called “Southwest Airlines Home Gate.” While consumers could not yet book flights online through Home Gate, they were able to receive up-to-date information and flight routes. In addition, online users of the Home Gate could receive coupons and discounts for air travel.

In 2000, Southwest Airlines launched a booking tool geared toward corporate travel. This was a great addition to its online functionality and serviced the type of consumer that used Southwest Airlines the most: the corporate commuter. This allowed corporate commuters to receive discounts directly through Southwest Airlines rather than needing to go through corporate discounts.

4. The Background of Southwest’s Ticker Symbol, “LUV”

When Southwest Airlines first launched, it implemented a love potion theme. All flight attendants dressed in love-associated costumes and passed out “love potions” and “love bites,” which later became known as drinks and peanuts.

When Southwest Airlines was listed on the New York Stock Exchange (NYSE), it chose the ticker symbol LUV because of the company’s love potion beginnings.

What Is Southwest Airlines?

Southwest Airlines is a major American airline known for its low-cost fares, free checked bags, and no-frills service. Founded in 1967, it has grown to become the largest domestic airline in the United States

How Did Southwest Airlines Get Its Name?

Southwest Airlines got its name because it initially operated routes within the southwestern United States. The airline’s first flights were between Dallas, Houston, and San Antonio, which fit the “Southwest” theme.

What Makes Southwest Airlines Different From Other Airlines?

Southwest Airlines stands out for its business model focused on low-cost fares, free checked bags, and no change fees. It also operates on a point-to-point route system rather than a hub-and-spoke model, which reduces delays and simplifies operations. Southwest acts more as a low-cost airline provider as opposed to a “higher end service” business model.

The Bottom Line

There’s a lot of things you may not know about Southwest. Southwest owes part of its mission for operational efficiency to its history, and it revolutionized air travel with a fast turnaround time to meet its schedules. Additionally, the airline initially operated as a commuter service in Texas for nine years before expanding.

Fact checked by Ariel Courage
Reviewed by Chip Stapleton

The world’s car manufacturers put another 93.5 million vehicles on the roads in 2023, the last full-year numbers currently available. Most of the nations that produce most of the vehicles showed increased production for the year, from a 12% increase in China and 15% in Japan to just 6% in the U.S.

The top-selling car brand globally as of 2023 were Toyota, at 11.07%, followed by Volkswagen, at 6.41%, and Honda, at 4.18%.

Here we take a closer look at the production numbers from the top six countries in terms of the number of cars manufactured, including China, the U.S., Japan, Germany, India, and South Korea.

Key Takeaways

• Globally, motor vehicle production rose 10% to 93.5 million.
• Global production took a huge hit in 2020 and 2021 due to the COVID-19 pandemic but steadily recovered through the following years.
• China continues to rank as the number one producer of cars by volume..
• Following China, the United States, Japan, Germany, India, and South Korea round out the top six car producers.

1. China

China, the world’s biggest manufacturer overall, leads the world as a producer of cars. The country’s 2023 production totaled more than 30 million vehicles, adding up to more than 30% of all cars and trucks produced globally.

More than 26 million of those vehicles were passenger cars, in addition to 4 million commercial vehicles.

Chinese-made vehicles used to stay in China but the country’s export reach has grown. Their major destinations include European Union countries, despite punitive tariffs on China’s electric vehicles, as well as Central America and South America.

2. U.S.

The United States produced about 10.6 million cars and trucks in 2023, a 6% increase over the previous year.

Unlike other countries, the U.S. is big on trucks: more than 8.8 million of the vehicles produced were classed as commercial vehicles.

Note

In 2024, global sales of electric and plug-in hybrid vehicles grew by 25% to more than 17 million vehicles.

3. Japan

After a precipitous drop in production from 2020-2022 due to the COVID-19 pandemic, Japan produced just under 9 million vehicles in 2023. That’s still down from its pre-COVID total of nearly 9.7 million in 2019.

4. Germany

Top German automakers including Volkswagen AG, BMW AG, and Daimler AG produced approximately 4.1 million vehicles in 2023. This figure represented an 8% increase from the previous year.

5. India

While not well-known in America or Europe as a vehicle manufacturer, India produced 5.8 million of them in 2023. That’s an annual increase of 7%. India’s export markets for vehicles include Saudi Arabia, South Africa, and Mexico.

6. South Korea

Its logos like Hyundai and Kia are well known to American car buyers, but South Korea briefly lost its sixth-place global ranking to Mexico. It made a comeback in 2023, producing more than 4.2 million vehicles compared to Mexico’s total of 4 million.

That represents a 13% boost in South Korea’s numbers.

What Are the World’s Top-Selling Car Brands?

Toyota is the top-selling car manufacturer globally, with 8.57 million vehicles sold in 2023. That’s a market share of 11.18%.

Volkswagen comes in second at 4.97 million vehicles sold, or 6.41% market share.

Honda is in third place at 3.77 million, a market share of 4.87%.

What Are the Most Popular Brands Regionally?

In North America, Ford and Chevrolet vehicles remain popular. In Europe, Volkswagen dominates. In Asia, it’s Toyota and Hyundai.

What Is the Fastest-Growing Car Manufacturer?

The world’s fastest-growing vehicle brand is BYD Auto, up 47.46% year-over-year in 2023. In second place is GAC Group, up 37.27% year over year. Both are Chinese manufacturers.

The Bottom Line

Car manufacturing is a truly global market. Toyota, Volkswagen, and Honda lead the pack in global market share. But some fast-growing manufacturers bear names that few Americans would probably recognize. They include BYD Auto and GAC Group, two Chinese companies.

Reviewed by Caitlin Clarke

Escalation clauses are often used to facilitate the creation of long-term contracts as wages or prices fluctuate over time. In these contract negotiations, the Consumer Price Index (CPI) is one of the most frequently used measurements for applying or triggering an escalation clause.

Key Takeaways

• Escalation clauses frequently facilitate the creation of long-term contracts, and the Consumer Price Index (CPI) is often used as a measurement to apply or trigger an escalation clause.
• Escalation clauses are used in contracts for rental property, labor, insurance, court-ordered support payments, and goods and services. The CPI is also used for escalation in government benefits provided to eligible individuals.
• When implementing an escalation clause modifier such as the CPI, the contract must precisely define how periodic adjustments are made to the contract and the figure that the adjustment is applied to.

Adding an Increase Clause in Contracts with CPI

Typically, sellers are hesitant to lock in a set price on a long-term contract for fear of losing the benefit of possible market appreciation in the value of their goods or services. In addition, changes that may occur over time due to inflation or other economic factors could also create a benefit for the seller to keep pricing changes open.

On the flip side, however, it is often convenient for buyers to be able to secure long-term agreements on pricing, either to ensure a steady supply or to be able to budget for long-term expenditures. To meet in the middle, a solution that is usually agreeable to both parties involves including an escalation clause that periodically adjusts the contract price in accordance with an agreed-upon indicator of market price changes. The CPI is such an indicator; it is widely accepted as providing a reasonably accurate reflection of price changes due to inflation.

Important

The Consumer Price Index (CPI) is useful for both sellers and buyers to agree on incremental changes in negotiating the price for a long-term contract.

What Contracts Have Escalation Clauses with CPI?

Escalation clauses are applied to contracts for rental property, labor, insurance, court-ordered support payments, and a myriad of contracts for goods and services. One well-known economic area in which the CPI is used for escalation includes government benefits provided to eligible individuals.

For example, the CPI provides the basis for the annual cost of living increases for recipients of Social Security benefits. The CPI is not a direct cost of living indicator; it is merely a price survey of a broad basket of consumer staples, but it is still utilized to estimate any cost of living changes.

Considerations in Implementing the CPI

When implementing an escalation clause modifier such as the CPI, the contract must precisely define how periodic adjustments are made to the contract and the figure that the adjustment is applied to.

For example, in a rental contract, the adjustment may be made solely to the base rent amount or may be applied to a larger figure that includes other secondary items such as utilities or maintenance services.

The particular variation of the CPI to be employed must also be specified. In fact, the government computes variations of the CPI for different areas of the country in addition to the standard overall CPI calculation. This standard calculation is known as the Consumer Price Index for All Urban Consumers (CPI-U), which purports to show the average CPI for urban workers in all U.S. cities.

Adjustment Timing and Formula Stipulations

The contract necessarily states how often adjustments are to be made or considered. Escalation adjustments most commonly occur on an annual basis, but they may be applied more or less frequently according to whatever agreement the parties to the contract reach. When using the CPI as an escalation modifier, the different variations of the CPI are not all provided with equal frequency. Indexes for some of the U.S. metropolitan areas are only published by the Bureau of Labor Statistics semiannually and therefore are not appropriate for contract situations in which the parties wish to make inflation-related price adjustments every month.

The specific formula for adjustment is also stated in the contract. Commonly, the price adjustment made is a percentage equal to the percent change of the CPI, but a contract may stipulate using a multiplier that results in a greater or lesser adjustment than the change in the CPI number. Some contracts additionally stipulate a maximum total price increase or guarantee a periodic minimum increase.

What Is a Contract?

A contract is a legally binding agreement between two or more parties that outlines the terms and conditions of a transaction, specifying the obligations that each party must fulfill, essentially creating a mutual relationship with enforceable legal consequences if either party fails to meet their agreed-upon terms.

What Is an Escalation Clause?

An escalation clause is a provision in a contract that allows for an increase in the agreed-upon wages or prices if certain conditions change while the contract is in effect. It is also known as an escalator clause.

What Is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.

The Bottom Line

Escalation clauses are often used to ease the creation of long-term contracts as wages or prices vary over time. In these contract negotiations, the Consumer Price Index (CPI) is one of the most frequently used measurements for applying or triggering an escalation clause.

Advantages of an escalation clause in a contract with the CPI include allowing for automatic wage adjustments for inflation; promoting stability and fairness in the employment relationship, especially during economic fluctuation; and incentivizing employers to maintain productivity by clearly linking economic performance and wage increases.

Disadvantages of an escalation clause in a contract with the CPI include limiting a company’s ability to budget accurately, thus leading to potential unexpected cost hikes based on market fluctuations; and reducing a company’s negotiating power in future wage discussions, as the clause can already state a maximum wage increase upfront.

Reviewed by Samantha Silberstein

Cost of capital is the return that is necessary for a company to invest in a major project like building a plant or factory. To optimize profitability, a company will only invest or expand operations when the projected returns from a project are greater than cost of capital, which includes both debt and equity.

Debt capital is raised by borrowing funds through various channels, such as acquiring loans or credit card financing. On the other hand, equity financing is the act of selling shares of common or preferred stock. The primary way that market risk affects cost of capital is through its effect on cost of equity.

Key Takeaways

• Cost of capital refers to the return required to make a company’s capital investment project worthwhile.
• Cost of capital includes debt financing and equity funding.
• Market risk affects cost of capital through the costs of equity funding.
• Cost of equity is typically viewed through the lens of the capital asset pricing model (CAPM).
• Estimating cost of equity can help companies minimize total cost of capital, while giving investors a sense of whether or not expected returns are enough to compensate for the risk.

Understanding Cost of Capital

A company’s total cost of capital includes both the funds required to pay interest on debt financing and the dividends on equity funding. The cost of equity funding is determined by estimating the average return on investment that could be expected based on returns generated by the wider market. Therefore, because market risk directly affects the cost of equity funding, it also directly affects the total cost of capital.

The cost of equity funding is generally determined using the capital asset pricing model (CAPM). This formula utilizes the total average market return and the beta value of the stock in question to determine the rate of return that stockholders might reasonably expect based on the perceived investment risk. The average market return is estimated using the rate of return generated by a major market index, such as the S&P 500 or the Dow Jones Industrial Average. The market return is further subdivided into the market risk premium and the risk-free rate.

The risk-free rate of return is typically estimated using the rate of return of short-term Treasury bills because these securities have stable values with guaranteed returns backed by the U.S. government. The market risk premium is equal to the market return minus the risk-free rate and reflects the percentage of investment return that can be attributed to stock market volatility.

For example, if the current average rate of return for investments in the S&P 500 is 12% and the guaranteed rate of return on short-term Treasury bonds is 4%, then the market risk premium is 12% – 4%, or 8%.

Computing Cost of Capital with CAPM

The cost of equity capital, as determined by the CAPM method, is equal to the risk-free rate plus the market risk premium multiplied by the beta value of the stock in question. A stock’s beta is a metric that reflects the volatility of a given stock relative to the volatility of the larger market.

A beta value of 1 indicates that the stock in question is equally as volatile as the larger market. If the S&P 500 jumps 15%, for instance, the stock is expected to show similar 15% gains. Beta values between 0 and 1 indicate the stock is less volatile than the market, while values above 1 indicate greater volatility.

Assume a stock has a beta value of 1.2, the Nasdaq generates average returns of 10%, and the guaranteed rate of return on short-term Treasury bonds is 5.5%. The rate of return that can reasonably be expected by investors can be computed using the CAPM:

$begin{aligned} &text{Return} = 5.5$​Return=5.5%+1.2×(10%−5.5%)=10.9%​

Using this method of estimating the cost of equity capital enables businesses to determine the most cost-effective means of raising funds, thereby minimizing the total cost of capital. From the perspective of the investor, the results can help decide whether the expected return justifies investment given the potential risk.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

Fact checked by Vikki Velasquez

Term life and whole life are two of the most common types of life insurance policies—providing a tax-free payout to your loved ones if you die. Term life insurance is simpler and cheaper, and may be suitable if you mainly need income replacement for a specific time, like while you’re raising kids. Whole life insurance provides lifelong coverage and can act like a tax-advantaged retirement savings plan with a guaranteed rate of return. Here’s how to understand the pros, cons, and best uses of each.

Key Takeaways

• Term life insurance provides coverage for a predetermined period (the term) and is more affordable than whole life insurance. It does not accumulate cash value, meaning you can’t withdraw or borrow against the policy while you’re alive.
• Whole life insurance offers lifelong coverage so long as you continue paying your premiums and includes an investment component that grows over time. However, whole life policies are significantly more expensive than term life insurance.
• Term life is ideal if you only need coverage for a finite period, such as while raising children or paying off a mortgage.
• Whole life is better for those who want coverage for life as well as the ability to build retirement wealth and income through the policy’s cash value account.
• Some term life policies offer a conversion option that allows you to switch it to a whole life policy in the future. If you think you might want lifelong coverage eventually, but prefer a lower-cost term life policy for right now, look for a convertible term policy.

Term Life Insurance: Affordable Coverage for a Limited Time

Term life insurance covers you for a set period, like 10, 15, 20, or 30 years. Some insurers may offer terms of up to 40 years. 

The longer your term is, the higher your life insurance premiums will be. If you die during the term, your beneficiaries must file a claim with the insurance company. If the insurer approves it, your beneficiaries will receive a tax-free cash payout, or death benefit. This money can be used for anything, from replacing your income to covering funeral costs to paying off debts like a mortgage or student loans. If you outlive the policy term, the policy expires, and no payout is made.

Benefits of Term Life Insurance

• Affordable premiums: Term life is often significantly cheaper than whole life insurance. In fact, for a 40-year-old man with excellent health, the average term policy costs as little as $27 per month for a 30-year term policy with a $250,000 death benefit, according to quotes gathered by Investopedia. For a woman with a similar age and health profile, it’s $22 per month. These same applicants could potentially pay hundreds of dollars more for a whole life policy with the same amount of coverage.
• Simplicity of coverage: Term life insurance is about as simple as it gets when it comes to insurance. You pay a premium for a term that lasts a set number of years, and if you die during that term, your beneficiaries will be paid a death benefit. There are no additional components or accounts to manage. 
• Coverage flexibility: You can choose a term that corresponds with the length of any debt obligations you might have. For example, if you have a 30-year mortgage, you can opt for a 30-year term policy to ensure your family can pay off the house if you die during the term. 
• Investment flexibility: Term life can free up money for other investments. The savings compared to whole life could go into an individual retirement account (IRA) or your 401(k). While whole life policies with cash value can grow in value over time, your gains might be limited compared to investing in an index fund.

Drawbacks of Term Life Insurance

• No cash value or investment component: Unlike whole life or other types of permanent life insurance policies, term life does not accumulate cash value that you can use for your own retirement income or estate planning needs. If you outlive the policy term, you get nothing back from what you paid to keep it active. You can add a return of premium rider—albeit for a much higher cost—to your term life policy to get some or all of your premiums back at the end of your term.
• Limited coverage duration: Once the policy term ends, so does your life insurance coverage. If you still need life insurance, you can renew the policy or purchase a new one, but remember that this will likely be more expensive due to your older age and the additional health risks associated with it.
• High renewal costs: Term life insurance premiums are fixed for the duration of the term, but if you renew your coverage after your current policy expires, you could face a sharp increase in premiums.

Who Should Consider Term Life Insurance?

Term life insurance is designed to provide a financial safety net to families for specific periods when financial obligations are at their highest—such as while raising children or while paying down a mortgage or other debts that could outlive you should you die during the policy term. For example:

• Young families: If you have young children, a 20- or 30-year term policy ensures they can afford an education and maintain their standard of living until they’re old enough to support themselves.
• Homeowners: If you have a mortgage, a term life insurance policy that extends up until or beyond the mortgage term can help ensure your family can pay off the home if you die before it’s paid off.
• Debt holders: If you have significant personal debts, such as a student loan or credit card debt, the death benefit from a term life insurance policy can help to cover those obligations.

Note

Your loved ones won’t inherit debt unless they’re co-signers, but creditors may make claims against your estate.

Whole Life Insurance: Lifetime Protection With Cash Value

Whole life insurance is a type of permanent life insurance that provides coverage until you die or until you stop paying your premiums. In addition to the payout to your family, it comes with a cash component that grows at a guaranteed rate and that you can access while you’re still alive.

Because whole life insurance comes with cash value and is much more likely to pay out, the cost of coverage is much higher than that of term life insurance. And while you’re free to borrow against or withdraw from your policy’s cash value during your lifetime, doing either comes with potential risks.

Benefits of Whole Life Insurance

• Lifelong protection: Unlike term life, whole life insurance policies do not expire. As long as you make regular premium payments and the policy doesn’t lapse, your beneficiaries will receive a death benefit when you die.
• Cash value feature: The cash value component of whole life insurance grows over time on a tax-deferred basis. You can borrow against the accumulated cash value or withdraw from it, often tax-free, for expenses like college tuition, home repairs, or retirement income.
• Fixed premiums for life: Whole life insurance features a level premium, meaning your premiums are fixed for the duration of the policy. And since the coverage lasts as long as you live (or stop paying premiums), you don’t need to worry about renewing it for potentially higher costs as you would with a term policy.
• Tax advantages: The cash value part of whole life policies grows on a tax-deferred basis. If you decide to take out loans or withdraw against the death benefit, those are also generally tax-free unless the amount is more than you’ve paid in premiums. The death benefit is also tax-free for your beneficiaries.

Drawbacks of Whole Life Insurance

• Higher premiums: Whole life insurance is significantly more expensive than term life insurance. A $500,000 whole life policy for a 35-year-old man can cost more than $500 per month.
• Coverage complexity: For those who are less familiar with how life insurance and financial planning work, a whole life policy’s cash value, dividends, and policy loan components can be challenging to understand and manage. 
• Low rate of return: You may gain more by purchasing an affordable term life policy and depositing the difference into your emergency fund or a self-funded investment or retirement account.
• Surrender charges for early cancellation: If you decide to cancel your whole life policy within the first 10 to 15 years that it’s in force, your insurance company may hit you with surrender charges that can reduce any accompanying cash value you receive after terminating the policy. You’ll also be taxed on the cash you receive from surrendering the policy.

Who Should Consider Whole Life Insurance?

Whole life insurance may be a good option if you want lifelong income protection for your beneficiaries and the flexibility to tap into the accumulated cash value while you’re still alive. Overall, whole life insurance is best for the following demographics or circumstances:

• High-net-worth individuals: If you own a significant amount in assets, whole life insurance can provide a tax-free way to transfer it to your heirs when you die. It could also offer another way to save for retirement if you’ve maxed out your 401(k).
• Parents of disabled children: If you have a dependent with disabilities who requires lifelong financial support and in-person care, a whole life insurance policy can provide a financial safety net to ensure their needs are met long after you’re gone.
• Small business owners: If you own a small business, whole life insurance can help with succession planning. The payout can allow your partners to buy your shares as part of a buy-sell agreement. It can also help cover estate taxes and other transition costs, ensuring the business continues without you.

Which Policy Is Right for You?

To determine whether a term life or whole life policy is best for you and your circumstances, consider the following.

Your Budget

Your budget is one of the most significant factors when choosing between term and whole life insurance. Term life insurance is much more affordable, making it a better choice for those who need coverage but have limited funds. Whole life insurance is more expensive but provides you with coverage until you die and a cash value component that can serve as a financial tool.

Your Long-Term Financial Goals

Your long-term financial goals should also play a role in your decision. If you’re just looking for a simple, affordable way to protect your family during a specific period, term life insurance may be the best choice. However, if you want to build cash value over time and have lifelong coverage, whole life insurance may be more appropriate. 

Your Retirement Planning Needs

The cash value component of whole life insurance can also supplement your retirement savings. While not a replacement for a 401(k) or IRA, the cash value from a whole life policy can provide you with additional tax-deferred retirement income. If you’ve already maxed out your IRA or 401(k) contributions and have more money you’d like to allocate toward retirement, a whole life policy could add a much-needed layer of stability and diversification to your portfolio.

Converting Term to Whole Life Insurance: Is It the Right Move?

If you find the affordability of term life insurance appealing but want the flexibility to convert it to permanent coverage as your life or financial circumstances change, you may want to consider a convertible term life insurance policy. 

A convertible term policy lets you convert your term life insurance into a whole life policy without undergoing a medical exam. This can be beneficial if your financial situation changes or you develop health issues down the line that make it more challenging to be approved for a new term or whole life policy.

Benefits of Term Life Conversion

• Coverage flexibility: You can start with cheaper coverage and transition to permanent coverage later. This is helpful if you expect your income to rise or worry about future health problems making it hard to get insurance.
• No medical exam: When you convert your term life policy to whole life, you typically do not need a new health evaluation or medical exam, which can be a crucial win if your health declines.
• Premiums are locked in: Whole life policies have fixed premiums, so converting early may help you secure a more favorable rate.

Drawbacks of Term Life Conversion

• Potentially higher costs: Whole life insurance is significantly more expensive than term. So while the no-medical-exam feature of a conversion policy may guarantee you’ll be approved at a predetermined rate if you convert to a whole life policy, the rate you end up with will still be significantly higher than if you renewed or purchased a new term policy.
• Limited conversion period: Many policies have conversion deadlines, so you’ll need to decide ahead of time whether to convert to a permanent policy.

Who Should Consider a Term to Permanent Life Conversion?

• People with changing financial situations: If your financial outlook has improved and you can afford higher premiums, converting to whole life may be a good option.
• Those with current or future health concerns: If your health is declining or your family has a history of health issues, a convertible term policy can help you maintain coverage without taking a new medical exam.
• Families with potential long-term care needs: If your family requires lifelong financial support but you can’t afford whole life insurance right now, a convertible term policy gives you time. When you can afford it, you can switch to whole life, ensuring your family’s long-term needs are met.

The Bottom Line

Both term and whole life insurance offer a safety net for your family, but they work in different ways. Term life is an affordable option for temporary coverage, while whole life provides lifelong protection and builds cash value, but at a higher cost. The best choice depends on your financial goals, budget, and long-term needs.

Reviewed by JeFreda R. Brown

Why is the price of a company’s shares high one day and lower the next? Share prices move up and down all the time during trading sessions. But a major change in price can be due to a stock split.

Public companies may opt to use stock splits at one point or another, thereby increasing the number of shares outstanding and decreasing the share price.

By doing so, a company can keep its shares in a price range that doesn’t look too expensive to investors.

Key Takeaways

• A stock split increases the number of shares outstanding and reduces share price.
• It doesn’t change the value of an investor’s holding of shares.
• Companies announce stock splits when they believe the high price of their stock is making it inaccessible to many investors.
• Investors may become more interested in buying the stock after a split, which, in turn, can push up the share price.
• Berkshire Hathaway’s Class A stock was priced at more than $753,000 per share on Feb. 27, 2025 but Warren Buffett has no plans for a split.

What Is a Stock Split?

A stock split is an action announced by a corporate board that issues new shares of the company’s stock to existing shareholders. At the same time, the value of a share is adjusted downward proportionately.

That means that the value of the shares held by an investor remains the same as it was before the split.

So, say an investor owns 30 shares of company stock at $50 per share, for a total value of $1,500. The company announces a 2-for-1 split.

It will present the investor with two new shares for every one that they own. And the company will adjust the price of a share down to $25.

As a result, the investor will own 60 shares at $25 per share. The total value is still $1,500.

Reasons for a Stock Split

A company may decide on a stock split for various reasons:

• A high share price may cause investors to avoid the stock because it’s unaffordable or because they perceive that it can’t appreciate much more.
• Lower priced shares attract more investors, which can push up share value.
• News of a stock split can boost media attention and, in turn, demand for the stock.
• Stock splits can indicate a company’s confidence in its growth prospects.

Stock Split Example

Microsoft

A tenacious growth stock since its inception, software giant Microsoft (MSFT) provides a prime example of consistent stock splitting used to maintain an attractive trading range.

From 1987 to 2003, Microsoft split nine times in 2-for-1 and 3-for-2 splits.

Each time the stock split, the share price was lowered, and the number of shares outstanding increased. As of the last split, one original share was equivalent to 288 shares.

If you bought 100 shares at $115.20 per share on Sep. 11, 1987, before the first split occurred, the original value of your holdings would have been $11,520. After all the splits, you’d own 28,800 shares with a value of $11,470,462.78.

On Feb. 27, 2025, a share of Microsoft traded above $398.

Berkshire Hathaway

Some companies don’t use stock splits. Investor Warren Buffett’s holding company, Berkshire Hathaway, is a prominent example.

Since Buffett came to control the firm, its Class A stock has never split, even as the price-per-share has grown incredibly since the 1960s.

Berkshire Hathaway’s stock was already trading at more than $8,000 a share by the late 1980s. On Feb. 27, 2025, Berkshire Hathaway Class A (BRK.A) shares traded at more than $756,570 per share.

Note

While Berkshire Hathaway has never split its Class A stock, in 2010, it split its newer Class B stock 50-for-1 when it acquired Burlington Northern. On Feb. 27, 2025, BRK.B traded at more than $503.25 per share.

How Do You Know if a Stock Is Going to Split?

The company whose shares you own will announce a stock split and you may hear about it through its reporting, by an SEC filing, or when you watch the financial news. You may find out about it after the fact, when you notice that your account shows an unexpected number of additional shares.

Do Stock Prices Go Up After a Split?

Sometimes they do, if the news of a split attracts fresh investor attention and demand. But a rise in price isn’t guaranteed.

Does a 2-for-1 Stock Split Double Your Money?

No. A stock split increases the number of shares that existing shareholders own. But it also adjusts the share price downward to account for the additional shares. So if you owned 10 shares at $100 per share before the split, you’d own 20 shares at $50 after it.

The Bottom Line

The share price of common stocks can be higher on one day compared to the next for a number of reasons, such as market volatility, industry or economic news, regulatory changes, and more.

But a big difference in share price could be due to a stock split, which results in existing shareholders receiving additional shares with a new lower value.

Master the Market with Proven Investment Strategies

Many people have a lot riding on their investments. It arguably provides the best chance to achieve long-term financial goals, whether generating enough money to retire, giving children or grandchildren a big helping hand as they begin their adult life, or something else entirely.

With so much money at stake, it’s crucial to have a plan. Selecting the right investments is important, but there’s more to it than that. You should also craft a set of guiding principles and learn about how financial markets work. Doing so can reduce the risk of making mistakes in the heat of the moment and maximize your returns.

This article looks at 10 key rules for making the most of your investments.

Key Takeaways

• Knowing how markets work and having a plan makes dealing with volatility and bear markets easier.
• Impulse buying and selling often ends badly.
• The more you plan ahead, the better prepared you’ll be to make the right calls under pressure.
• Don’t just follow the crowd. Do your research and aim to buy low and sell high.
• Buying for the long term and standing by your convictions is generally the best strategy.

Rule 1: Understand Market Cycles

Asset prices generally rise, fall, then rise again. And it’s not all random. These phases of expansion and contraction form part of a cycle that regularly repeats itself.

In good times, companies invest, consumers spend, banks lend money at reasonable rates, and most stocks rise in value. The good times don’t last forever (indeed, a sign that it’s coming to an end is seeing some claiming they never will.) Eventually, costs rise too much and investments fetch more than their historical norms. At this point, a “correction” begins as the economy weakens and investors retreat, paving the way for the cycle to repeat again.

The key takeaway from this is not to panic when prices start dropping. Over time, the stock market should continue its upward trajectory—historically, it always has, but that’s cold comfort in the moment.

Rule 2: Avoid Emotional Investing

One of the main reasons investors are advised to establish guidelines before investing is to reduce the chance of emotions getting the better of them. When investors log in to their accounts during bouts of volatility, they tend to be impulsive, buying more of the winners and dumping the losers. Often that turns out to be a mistake.

“The worst investment decisions are those driven by fear or greed,” said Alex Campbell, head of communications at U.K.-based financial technology company FreeTrade. “Take some time to consider the drop in light of your investment strategy and reflect on the move that you feel is right based on the available information.”

Rule 3: Sometimes It Pays To Be a Contrarian

“Buying low and selling high” means being a contrarian—buying or selling when others are not. It requires a lot more research on your part. It’s not just a case of buying everything out of favor. The market is generally right and most stocks are cheap for a reason.

To be successful, you’ll need to scrutinize the data, be a critical thinker, and not get distracted by what others say. A good starting point is learning to recognize overcorrections. For example, investors can sometimes excessively punish the entire market when the economy is stuttering or oversell specific stocks because of adverse temporary factors.

Advisor Insight

Asked what he tells newer investors, Yvan Byeajee, author of Trading Composure: Mastering Your Mind for Trading Success, was succinct: “Cultivate a deep embrace of uncertainty.” He added, “It’s not enough to acknowledge uncertainty or risk intellectually; you need to accept it emotionally and allow them to guide your decision-making without fear or resistance.”

Rule 4: Know When To Exit

Normally, a long-term buy-and-hold strategy is considered the best way to go. However, sometimes it’s necessary to walk away earlier than planned. Byeajee said too many investors approach some investments like the lottery.

“This mindset can be disastrous, leading to behaviors like chasing trends, panic selling, or overleveraging—all of which will likely wipe out gains and erode confidence,” he said. “Sustainable investing is about playing the long game, respecting the process, and allowing compounding to work its magic over time.” 

To avoid making mistakes, it’s sensible to draw up an exit strategy at the onset before the investments are made. Common methods include setting price targets, loss limits, and time frames for your investment. You should also consider triggering events that could make you lose confidence and that your risk tolerance could change over time.

Rule 5: Diversify Your Portfolio

Investors are regularly advised to spread their money across numerous investments. “For most people in most situations, a long-term, buy-and-hold, diversified, low-cost investment approach is likely more suitable than active trading,” said David Tenerelli, a certified financial planner at Values Added Financial Planning in Plano, Texas. “This is because it helps the investor ignore the ‘noise’ and instead focus on a disciplined approach.”

The logic behind diversification is that different assets will react differently to the same events. In theory, that means if one investment does badly, its impact will be limited as the other assets in the portfolio should perform better.

Rule 6: Follow Broader Market Indicators

Stock market indexes track the performance of a selection of publicly traded companies and so function as a barometer of segments of the stock market. There are a variety of indexes to keep tabs on. Some focus on specific sectors or the country’s biggest companies by market cap. For a representation of the entire U.S. stock market, a good place to look is the Wilshire 5000 or Russell 3000.

Rule 7: Recognize Bear Market Patterns

Bear markets—when there’s a steep drop in asset prices—are less scary when you understand how they work.

These periods of prolonged price declines are usually broken down into four distinct phases, which SteelPeak Wealth, a Los Angeles-based wealth management firm, describes as follows:

1. Recognition. Prices start fluctuating yet most investors shrug it off as normal ups and downs. Eventually, they begin to realize a bear market is impending and stop buying on the dips.
2. Panic. Prices plummet, the media reports doom and gloom, and investors panic sell.
3. Stabilization. Stocks halt their decline but the outlook remains grim and any rally triggered by optimists is usually knocked back.
4. Anticipation. The recovery begins.

Timing the market is extremely difficult. For most investors, the best way to behave during bear markets is to not panic, focus on the long term, and take advantage of dollar cost averaging.

Rule 8: Be Skeptical of Forecasts

The internet is littered with predictions from so-called gurus. You’re best off ignoring them. A study from the CXO Advisory Group found that their accuracy was, on average, just under 47%. That’s worse than flipping a coin.

“Market forecasts should be ignored, regardless of whom they come from—professional economists or market gurus,” wrote Larry Swedroe, a consultant and outsourced chief investment officer, in response to that report. “Instead, investors are best served by having a well-thought-out plan, including rebalancing targets, and sticking to that plan.”

Rule 9: Prepare for Market Volatility

Market volatility is scary. Seeing your holdings are shedding value could make you want to dash for the exit and ignore your well-thought-out convictions. That’s the last thing you should do. Remember, markets go through ups and downs but generally rise in value over the long run.

Rule 10: Enjoy Bull Markets, Prepare for Bear Markets

Markets and prices move up and down. When they are rising, it can be tempting to be overconfident and throw more money at the winners. And when they plummet, you might want to do the opposite and dump everything, especially the laggards. Knowledge of how markets work will hopefully prevent you from panicking or being greedy.

If anything, you want to buy when assets you are convinced about are out of favor and sell when everyone is raving about them. Or better yet, do nothing and stick to your strategy. It’s time in the market rather than timing the market that often generates the best returns.

The Bottom Line

There are no guarantees of success in investing. However, if you understand market cycles and how indexes and bear markets work, avoid impulse buying or selling, adopt a contrarian mindset, draft an exit strategy, and maintain a diversified portfolio, you’ll have a much better chance of coming out on top.

“To succeed, traders and investors must trust the process even when the outcomes are temporarily unfavorable,” Byeajee said. “This mindset shift isn’t just important; it’s foundational. It’s the difference between reacting emotionally and acting strategically—not once or twice, but consistently.”

When you need to borrow money quickly, easy-approval loans can be an attractive option. Many of the easiest loans to get don’t require a credit check, have minimal requirements, and offer quick funding. 

While these emergency loans can be a simple go-to for unexpected expenses, there are some downsides. They often come with high interest rates and have short repayment terms. Understanding the risks and exploring alternatives can help you make an informed borrowing decision.

Key Takeaways

• Easy-approval loans offer fast access to cash with minimal approval requirements but often have high interest rates and fees.
• Borrowing limits vary by loan type and affect your options.
• Compare the cost of alternatives like banks, credit unions, and online lenders to choose the best option.

Payday Loans

Payday loans are short-term loans that must be repaid by your next payday. They typically don’t require a credit check, making them easy to qualify for, and they offer instant or same-day approvals. Loan amounts are low—typically in amounts of $500 or less. To guarantee repayment, borrowers provide a postdated check or authorize an automatic withdrawal when your paycheck or monthly government benefits deposit arrives.

There are no universal laws that define payday loans, according to the Consumer Financial Protection Bureau (CFPB). State laws vary, but many payday lenders operate online to get around strict regulations.

Payday loans generally come with extremely high APRs, often exceeding 400%. Because payday loans are due in one lump sum, many borrowers struggle with repayment and fall into a debt cycle.

Warning

Using rollover or renewal options allows you to extend your loan for an additional fee. However, this can quickly lead to a cycle of debt.

No-Credit-Check Loans

No-credit-check loans are designed for individuals with bad or no credit history who may not qualify for traditional personal loans. Loan amounts vary depending on the lender and your income.

While these loans offer easy approval because there’s often no minimum credit score, they come with high interest rates, sometimes as high as 195%. Some no-credit-check loans have origination fees, late payment penalties, or prepayment fees, which adds to your borrowing cost.

These loans have short repayment terms, which can make them difficult to manage. Because of the high interest rate and fees, no-credit-check loans carry a potential for predatory lending practices. On the plus side, you can repay these loans with fixed monthly payments, which makes it easier to budget for.

Unsecured Personal Loans

Unsecured personal loans don’t require collateral but require individuals to have fair credit, generally between 580 and 669 to qualify. Loan amounts often range from about $1,000 to $50,000, but the exact range will depend on lender. Some have higher interest rates and may carry origination fees, while others may have no fees and competitive interest rates. 

Borrowers with higher credit scores can qualify for a better interest rate, while those with lower credit scores may only qualify for high-interest-rate loans. Personal loans have fixed monthly payments, which makes them easier to manage compared to loans with short repayment terms.

For instance, OneMain Financial offers loans with rates up to 35.99% and origination fees up to 10%.

Retirement Plan Loans

Retirement plan loans allow you to borrow up to 50% or $50,000 from your vested 401(k) or other retirement account without a credit check. Interest rates are typically lower than personal loans or credit cards. Many employers allow you to repay your loan through automatic payroll deductions.

You typically have five years to repay a 401(k) or other retirement loan, unless you’re using the loan to purchase a primary residence. If you leave your job, you may have to repay the loan in full or risk having the loan taxed as a withdrawal. 

Note

Borrowing from your retirement savings can reduce your long-term savings and investment growth.

Pawnshop Loans

Pawnshop loans allow you to borrow money by using personal valuables—like jewelry or electronics—as collateral. Approval is instant and there’s no credit check required. Loans are based on the value of your pawned item, but you can only borrow a portion of the item’s resale value.

You typically have 30 to 90 days to repay the loan, depending on your state law. If you repay the loan on time, you get your item back. However, if you don’t repay, the pawnshop keeps your item and resells it.

There’s no credit check required for a pawnshop loan, which makes approval easier. However, a major drawback is the potential for high APRs, sometimes as high as 300%.

Alternatives to Easy-Approval Loans

Before opting for an easy-approval loan, consider a few alternatives:

• Banks and credit unions: Some financial institutions offer personal loans or short-term borrowing options with better terms. If you have an existing relationship with a bank or credit union, that’s a good place to start.
• Borrowing from family or friends: A trusted family member or friends may be willing to lend money to you, with minimal or no interest or fees. Repayment terms are more flexible, but it’s important to be clear to avoid conflicts. To avoid misunderstandings, put the loan terms in writing.
• Credit cards: You may be able to tap into an existing credit limit, by using your credit card for a purchase or taking a cash advance. Cash advances do come with a 3% to 5% fee and interest starts accruing immediately. The interest rate for cash advances is generally higher than for purchases, but still less expensive than payday loans.
• Online lenders: Many online lenders have more flexible lending requirements compared to traditional loans and they allow borrowers to pre-qualify. This makes these loans a good option if you don’t have the best credit. The application process is straightforward and you can often receive a quick decision on your loan application.
• Payment Plans: Some businesses, like medical providers or utility companies, offer payment plans instead of requiring you to pay upfront. Payment plans may be offered through third-party lenders or card issuers, so be sure to ask about the application.

The Bottom Line

Easy-approval loans provide quick access to cash but have risks and high costs. However, be aware that they can trap you in cycles of debt. Before choosing one of these options, consider loan alternatives with lower costs and less risk.

A Simplified Gift Registry, With More Products on the Way

Reviewed by Khadija Khartit

Zola is a wedding registry, planning, and retail e-commerce company designed to facilitate the full spectrum of activities weddings require, from using a wedding planning checklist to honeymoon experiences to filling your home with the necessities of married life.

Zola makes money by charging vendors to connect with couples and collecting a share of sales made using its website.

Key Takeaways

• Zola is a wedding registry, planning, and retail e-commerce company.
• Zola makes money by providing wedding services and a platform for vendors to connect with couples.
• Zola is in the wedding planning and services industry.

Zola’s Industry

Zola operates in the wedding services industry. It’s competing for market space with Amazon, Walmart, Macy’s, Pottery Barn, Bloomingdale’s, and many others, large and small. The global wedding services industry was estimated to be $182.6 billion in 2023 and is expected to grow 12.7% by 2030.

Business Model

The company appeals to millennials with its enormous online product catalog and easy-to-use app. Zola makes it easy to add or remove products and services to a registry with a swipe to the left or right, and provides a convenient alternative to the hours of wandering stores and scanning everything in sight. By providing one centralized online location for a couple’s registry, it cuts shopping time for wedding guests.

In addition, Zola offers features that set it apart from traditional gift registries. Gift buyers can pool their money to collectively purchase the most expensive items on a couple’s list. Couples can also request cash they might apply toward a honeymoon, a dream home, or whatever they choose. The ability to pool money together is a dream come true for couples. Couples can also choose when gifts are delivered, so they do not need to worry about their new dishes being left on the porch while they are on their honeymoon. Finally, Zola also has tools to help couples think outside the box when creating their registry lists, with features that can suggest interesting products they might never have thought of.

Zola’s website provides access to wedding planning solutions such as calendars, registries, reminders, vendor locations, and guest lists. The company recruits vendors who list their products and services on the e-commerce site, some of which offer various tailored experiences, discounts, wedding website building, and much more.

Zola’s Fundraising and Financials

Zola’s latest fundraising round was in 2020. Over eight rounds, it has raised about $240.8M. Seventeen investors have participated in the round, including Comcast Ventures, Lightspeed Ventures, Thrive Capital, Forerunner, and BAM Ventures. The company is rumored to have been valued at $650 million in 2019.

Where the Revenue Comes From

Similar to other online stores, Zola earns money by taking a cut of the purchases made through its site. When a customer buys an experience through Zola, like a guided trip or a wine tour, the company keeps some of the sale. When a customer buys a product, Zola keeps an amount comparable to other retailers.

Because the vast majority of the items Zola sells are shipped directly from the manufacturer or vendor, the company itself has practically no inventory. This means Zola has a much smaller overhead than competing services. While other sites such as Amazon (AMZN) offer registry services with wide ranges of products, Zola differentiates itself with a large selection of activity packages, cash options, and numerous ways to personalize the experience.

History and Leadership

Zola was co-founded in 2013 by Australian entrepreneur Shan-Lyn Ma, former Chief Product Officer at Chloe+Isabel and Gilt Group’s product lead. Ma founded the company with Nobu Nakaguchi, the former director of user experience and product management at Gilt Group. They were joined by Gilt Group founder Kevin Ryan and other colleagues at Gilt.

Recent Developments

Zola continues to add new wedding tools and services, in addition to offering wedding industry reports annually that cover wedding planning trends.

In April 2024, Zola announced an artificial intelligence tool designed to help couples split wedding planning chores fairly. The company found in client surveys that couples’ most significant concern when planning a wedding is that one person usually takes on more planning work (or decision-making) than the other. This leads to strain between the couple—the AI tool was created to help couples share wedding decision-making.

In its 2024 Wedding Trends report, Zola found that the average wedding costs more than $30,000. It’s survey also found that 89% of couples begin planning their wedding before one party asks the other to marry them.

In November 2024, Zola launched a card game called Imagine the Day. In it, couples draw cards to playfully discuss their future plans, values, money, and many of the issues they will face on their journey together.

What Does Zola Do?

Zola is a wedding services provider that assists couples in everything from planning their wedding to purchasing travel packages.

What Does Zola Charge For?

Zola doesn’t charge couples, but it charges vendors for connecting them to couples by taking a percentage of sales and charging connection fees.

Is It Safe to Buy From Zola?

Zola is a legitimate business and states it takes customer and vendor safety and security very seriously. According to the company, it employs an external security company, uses a third party payment processor, and aggressively acts on any suspicious activity.

The Bottom Line

Zola is a wedding planning services business that connects vendors and couples. Couples can create wedding and baby registries, collect funds from family and friends, and spend the funds on the website. Friends and family can purchase items from the registry while the couple is assisted with planning their big day.

Zola makes money by collecting sales percentages from vendors and manufacturers, but doesn’t take any money from couples planning their events.

A 529 plan can be a great way to save money for college, as earnings are generally exempt from federal and state income taxes if used for qualified education expenses. However, withdrawals from these accounts for non-qualified education expenses can be subject to taxes plus an additional 10% penalty. Fortunately, this penalty doesn’t apply under certain circumstances, such as when the beneficiary receives some form of tax-free educational assistance.

Key Takeaways

• A 529 plan is a tax-advantaged account used to save for qualified education expenses, lessening the need to rely on student loans. 
• If the account’s beneficiary receives any form of tax-free educational assistance, then a distribution of up to the amount awarded won’t be subject to the 10% penalty on non-qualified expenses.
• As it isn’t entirely clear when this exception can be made, the safest bet is to make a withdrawal prior to the end of the calendar year that the educational assistance was granted.

529 Plans: The Basics

A 529 plan, formally known as a qualified tuition program (QTP), is a type of tax-advantaged account that offers a way to save for educational expenses. Although the basic framework for these plans was devised at the federal level, the states determine the specifics of their respective plans, such as what the investment options are and whether there are any tax benefits.

Because a 529 withdrawal usually isn’t subject to income taxes, parents often open these accounts on behalf of their children to grow their college funds tax free. One type of 529 plan, called a prepaid tuition plan, can even be used to essentially prepay for future attendance at select institutions based on today’s tuition rates.

Anybody can set up a 529 account, so you could open one and name yourself as the beneficiary if you so choose. This can be a good option if you want to save money to attend grad school.

While 529 plans are primarily used to pay for college, changes in legislation over the years have expanded how these funds can be used, such as the Tax Cuts and Jobs Act (TCJA) allowing withdrawals of up to $10,000 per year to pay for K–12 tuition. Another example is the Setting Every Community Up for Retirement Enhancement (SECURE) Act permitting distributions to repay qualified student loans, up to a lifetime maximum of $10,000.

Consequences of Non-Qualified Withdrawals

Since they’ve already been taxed, 529 plan contributions can always be taken out tax free. However, when 529 funds are used to pay for non-qualified education expenses, the earnings portion of that withdrawal may be subject to income taxes and an additional 10% federal tax penalty.

Unfortunately, because distributions are allocated pro rata between a plan’s contributions and its earnings, you cannot make a contribution-only withdrawal.

You may also have to pay income taxes and the 10% penalty if you exceed any distribution limits, even if the money was technically used for a qualified education expense. For example, if you withdraw a total of $12,000 in a single year to pay for your child’s high school tuition, that’s $2,000 over the $10,000. You would then owe taxes and a 10% penalty on the earnings portion of that excess amount.

Options for Penalty-Free Non-Qualified Withdrawals

If you make a 529 withdrawal for a non-qualified education expense, there are certain circumstances where the 10% penalty won’t apply (though taxes still will). These include:

• The beneficiary dies or becomes disabled
• The beneficiary attends a United States military academy (not exceeding the costs of advanced education)
• The qualified education expenses were only taxed because the student or parent(s) claimed the American Opportunity Tax Credit (AOTC) or Lifetime Learning Credit (LLC)
• The beneficiary received any kind of nontaxable educational assistance (other than gifts or inheritances), including scholarships, fellowship grants, veterans’ educational assistance, and employer-provided educational assistance

Beneficiaries can avoid paying income taxes as well as the 10% penalty by rolling over a lifetime maximum of $35,000 from a 529 plan into a Roth individual retirement account (IRA), subject to annual contribution limits, so long as the 529 plan has been open for over 15 years.

Another possibility would be transfering the funds to an Achieving a Better Life Experience (ABLE) account, also subject to annual contribution limits. This is only an option for those who’ve been diagnosed with significant disabilities prior to their 26th birthday.

The Educational Assistance Exception

If you open a 529 account for your child and they’re later granted some form of nontaxable educational assistance, that may mean having more funds saved than are needed to cover their qualified education expenses. Fortunately, you can withdraw an amount up to the awarded value from the 529 plan and use the money for any purpose, without paying the 10% penalty.

The major downside of this exception is that it would result in the student having a lower adjusted qualified education expenses (AQEE), or their total qualified education expenses during an academic period minus any tax-free educational assistance they received. Making a 529 withdrawal in excess of the AQEE results in the earnings portion of that distribution becoming taxable. You still wouldn’t owe the 10% penalty, just income taxes.

The Internal Revenue Service (IRS) also doesn’t clearly spell out when 529 funds have to be withdrawn in order to count toward this exception. However, to be on the safe side, consider making the 529 distribution before the end of the same calendar year that the scholarship funds were awarded, suggests Larry Sprung, CFP, founder of Mitlin Financial.

“Although there is some ambiguity regarding the timing, I think taking a more conservative approach is better,” says Sprung. “I would also recommend that you maintain clear records of what amount was distributed, when, and for what calendar and school year. It would also make sense to confirm your strategy with your tax professional, so you are both on the same page as well.”

The Bottom Line

A 529 plan can be a great way to save for college while minimizing taxes, and there are options for accessing these funds even if you end up needing less money for school than anticipated.

In particular, not only does securing tax-free educational assistance reduce your college costs, it also gives you an opportunity to withdraw an equivalent amount from your 529 plan—without paying the 10% penalty on non-qualified distributions. You may still end up owing income taxes in this situation, but you’ll still be able to retain more of your 529 earnings than you might’ve otherwise.