Can You Use Life Insurance for College Savings? A life insurance policy provides a death benefit to your loved ones in case of your death, allowing you to withdraw or borrow the cash value. Life insurance can cover college expenses like tuition, room, and board, but it’s unclear if it can also be used for college savings. You may pay for your education expenses using the cash value of a life insurance policy.
Generally, there are three methods for doing that. This could involve borrowing a loan from your cash value or withdrawing money from the policy and subsequently renouncing it. There are a few advantages and disadvantages to weigh when using insurance for college savings. Furthermore, finding the best method to save for college expenses can be settled by speaking with a financial advisor.
How Does Life Insurance for College Savings Work?
You are obtaining a lump sum loan from the cash value of a life insurance policy, potentially avoiding loan payments if you are still alive. The remaining loan balance is removed from the death benefit at the time of your death, and any money left over is distributed to your beneficiaries. If loans are prohibited by your policy, you may decide to take out cash instead. The policy’s expiration date necessitates surrender, as selling it for cash will no longer provide coverage.
Benefits of Using Life Insurance for College Savings
Flexibility
You can choose how you want to pay for college with permanent life insurance. Generally, you can take out a loan, make withdrawals, or use the policy’s cash value to cover college costs without paying taxes.
Financial aid may not be affected
Using a cash value life insurance policy for college should not be considered when applying for financial aid. If you take out a loan against it, the borrowed amount is not included in the financial aid calculations.
Simple access to money
Permanent life insurance allows you to take money out whenever you want, tax-free, for qualified school expenses or for any other purpose.
Disadvantages of Using Life Insurance for College Savings
Permanent life insurance’s upfront and ongoing costs can make stock and bond fund fees seem like a good deal. However, there are disadvantages as well, such as
High premiums
It is expensive to use permanent life insurance. Stock and bond fund fees can appear extremely low due to various fees, including upfront, ongoing, insurance-related, and other factors. It may take ten years or longer for the cash value to exceed the premiums you have paid.
To be eligible for coverage
You must be insurable in order to obtain the policy. Finding a child or adolescent who is insurable is extremely unlikely. In addition, you would be preventing them from accessing the money you were putting aside for their benefit for years.
Interest payments
Loan payments reduce the coverage that would be available in the event of a final death claim, and additional life insurance premiums need to be paid.
Usually not a suitable substitute for a 529
Permanent life insurance policies with cash value are not suitable for whole life insurance due to their complexity and higher cost. Your life insurance policy can cover outstanding expenses for your child’s education if you die while they’re still in school. If your child doesn’t attend college, you can transfer your 529 plan to another beneficiary without incurring penalties.
What is a 529 plan?
A 529 plan is a type of tax-advantaged account that lets users save money for authorized educational costs and earn returns or interest. Additionally, mutual fund investments and withdrawals for K–12 and college expenses are part of savings plans. Prepaid tuition plans allow account holders to purchase credits from participating in-state public universities, but they are not universally available.
Final Thought
To find the option that best suits your needs, it’s essential to weigh all of your options for financing higher education, including Coverdell accounts and 529 plans. Additionally, if you do not currently have a life insurance policy, you may want to obtain a quote to estimate the cost of coverage.
