Life Insurance for College?
We have often said it for years: Life insurance works for College Funding.
Increasingly, other financial advisors across the country are introducing parents to the idea of life insurance to combat the soaring cost of college for their children.
Life insurance, that carries a cash balance, can be taken out and used to pay for college. Life insurance policies that are able to be used this way could include whole, universal-and variable-life policies that allow owners to withdraw a certain amount of the paid premiums without taxes or a penalty. Some other policies will allow holders to take out a loan from the insurance company using the cash value of the policy as collateral.
One advantage of using life insurance is that the assets are not counted in calculations to determine financial aid eligibility. This can offer some tax advantages over the more widely used 529 College savings Plans.
Assets that parents save in Section 529 college savings plans are counted in need-based-aid calculations and can reduce aid by a maximum of 5.64%. Of course, most 529 plans incorporate state tax deductions, and account withdrawals from the plans aren't taxed as long as they are used for higher-education expenses such as tuition.
However, while the insurance policies aren't counted as parent assets in the calculation of financial aid, the cash value pulled out of the policy may be treated as income and does count the following year in aid calculation.
Many companies sell insurance policies aimed at complementing a 529 college savings plan. Selling policies that provide a death benefit to fund the balance of college costs should something happen to a parent, are one example.
Funding college through a life insurance policy will make the most sense if the policy owners need long-term life insurance and plan to hold the policies for life. Your financial advisor needs to determine whether this strategy makes sense for your family, as this is not a "one size fits all" answer.
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We are in the business of helping families through the major life transition of sending their children to college. For many, it will be the most expensive time of their lives and, if not handled properly, could cost them their retirement.
Remember, you shouldn't have to choose between your child's college and your retirement.