If you pass away, a life insurance policy can give your loved ones a death benefit. While you’re still alive, you can take out or borrow the cash value that permanent life insurance has accrued. For instance, you could use whole or variable life insurance to save money for college expenses like tuition and room and board. However, can you use life insurance for college savings?
Yes, you could use the cash value of a life insurance policy to cover your college savings. Generally, there are three methods for doing that, borrowing a loan from your cash value, withdrawing, and giving up the policy. There are a few advantages and disadvantages 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.
You could use a withdrawal to get money for other expenses, like college. Additionally, when it comes time to pay out a claim, the death benefit would be diminished. The policy’s expiration date means that selling it for cash will no longer provide coverage. If you have a backup life insurance policy or believe you have sufficient assets, you may opt to use life insurance for college savings.
Benefits of Using Life Insurance for College Savings
There are several benefits to using permanent life insurance to cover college expenses, such as:
Flexibility
You can choose how you want to pay for college with permanent life insurance. Generally, you can take out a loan, withdraw, or use the policy’s cash value to cover college costs without paying taxes.
Financial aid may not be affected
Applying for financial aid should not take into account using a cash-value life insurance policy to pay for college. The amount borrowed is not included in the financial aid calculations if you take out a loan against it.
Simple access to money
You can withdraw money from permanent life insurance at any time for a tax-free distribution toward eligible educational costs or any other use.
Disadvantages of Using Life Insurance for College Savings
Some less appealing aspects of permanent life insurance include up-front and ongoing costs that 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. In addition to the usual upfront, ongoing, and insurance-related fees, other fees can make stock and bond fund fees appear extremely low. 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 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
You will be responsible for paying interest on any loans you take out. Additional life insurance premiums must be paid, and loan payments lower the coverage that would be available in the event of a final death claim.
Not a suitable substitute for a 529
Because of its complexity and higher cost, a permanent life insurance policy with cash value is usually not a good substitute for a 529 plan when it comes to whole life insurance.
Your life insurance can cover outstanding expenses for your child’s education if you die while they’re still enrolled in school. Additionally, you can always transfer your 529 plan to another beneficiary without incurring penalties if your child does not attend college.
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. Prepaid tuition plans and savings plans are the two varieties. Additionally, mutual fund investments and withdrawals for K–12 and college expenses are part of savings plans.
Account holders can buy credits from participating in-state public universities that agree to lock in the current tuition rate for future use through prepaid tuition plans. However, they are not available in every state.
Final Thought
If you have a permanent policy, you may want to think about using life insurance for college savings. To find the best financing option for higher education, consider all options such as 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.