When it comes to paying for college, many parents find themselves faced with rising tuition costs and uncertainty about the best way to save for education. While 529 education savings plans, or other state-sponsored savings accounts, certainly have their advantages, using life insurance to pay for college is an alternative that parents are tapping into. In fact, Sallie Mae, the nation’s largest private provider of student loans recently reported that 19 percent of families saving for college are including life insurance policies in their plans.
Turning a cash value insurance policy into tuition is easy
Parents with a cash value insurance policy can use it to pay for a child’s college education when the policyholder passes away. Thankfully, a tragedy isn’t the only way to turn a cash value life insurance policy into tuition payments. A cash value life insurance policy accumulates cash value on a tax-deferred basis. As such, the funds can be accessed as a tax-free loan or withdrawal when it comes time to pay your child’s college tuition costs.
When should you use a life insurance policy to pay for college?
The answer depends on your individual situation including factors such as your child’s age and your family income. Cash value life insurance policies are often more advantageous for parents with young children because it takes time for premium payments to accumulate to the point where there are enough funds to cover at least some college costs.
Cash value insurance policies may have sufficient values to allow you to withdraw up to the amount paid in premiums tax-free, or you can obtain a policy loan to cover the costs of a college education. There are some important caveats to be aware of. For example, there may be policy charges and fees which are an additional expense. Also, if you need the death benefit from your policy to make ends meet in the event of the death of a parent, you may not wish to tap into the policy proceeds for an alternative need such as college. The best way to determine if a cash value life insurance policy makes sense for you is to have an insurance review with one of our insurance professionals.
Cash value life insurance policies vs. 529 plans. Which is a better college saving strategy?
Both options have benefits, including tax advantaged savings and withdrawals. However, money invested in a 529 college savings plan can be used only for college expenses. So, if your child doesn’t attend college, or receives a full scholarship, the funds must be transferred to another beneficiary or withdrawn—with significant penalties. Also, the value of a 529 plan may depend on the strength of the stock market, so if there’s an economic downturn, it may have a negative impact on the amount of money available for college expenses.
On the flipside, a cash value life insurance policy gives parents financial flexibility and protection because the cash value of the policy can be utilized for any purpose and its value is sheltered from market volatility. The key here is to obtain a cash value life insurance policy to pay for college far enough in advance in order to accumulate enough cash value to cover college costs.
There’s no doubt that the cost of college education continues to rise. For parents who want to help their children avoid heavy student debt loads, it’s essential to create a college savings plan early. It’s also critical to explore all available financing options—including a cash value life insurance policy—for post-secondary education. We encourage you to talk with one of our insurance experts to learn more about college savings options and how we can help you make sure that you have a sound plan in place.
Tyler Webb, of Ann Arbor, specializes in home, auto, and life insurance. Tyler is able to use his background in banking to help his customers protect their assets by identifying their insurance needs. In his spare time, Tyler enjoys spending time with his wife and dog, drumming, and reading on financial wellness and fitness & health.
Join the conversation! Connect with Kemner Iott Benz on social media for more insurance tips and tricks!