While many people understand that a life insurance policy pays a death benefit to beneficiaries, according to the Allianz Life Insurance Company of North America’s 2018 Life Insurance Needs Survey, 51% of Americans are unsure or do not believe that the cash value from permanent life insurance can be used to help fund college education. Moreover, 66% were unsure or did not believe that life insurance benefits are normally tax-free.
While my wife and I purchased permanent life insurance policies primarily to safeguard our kids in the event that one of us died prematurely, we also recognized that the policies could provide the opportunity to grow financial value. If we needed to augment our college finance approach, we might borrow against the cash value of the policy through policy loans, presuming the policy had generated enough cash value to support loans.
(A word of caution: Policy loans and withdrawals lower the available cash value and death benefit, and may cause the policy to lapse or alter the policy’s lapse guarantees.) It’s possible that additional premium payments will be necessary to keep the coverage active. Withdrawals in excess of premiums paid will be taxed at standard rates.)
A portion of every dollar my wife and I put into our permanent life insurance policies goes toward insurance and expenses that assist pay the death benefit, with the balance going toward a cash value element that has grown tax-deferred over time. (Of course, this is based on experience; a policy’s ability to earn enough interest to sustain a borrowing plan is not guaranteed.)
By taking out a loan against the cash value balance and using the money tax-free, a portion of the money placed into the insurance can be used to help cover college expenditures, which must be paid back with interest.
One thing to remember is that the loan plus any interest owed cannot exceed the account’s total cash worth. If this happens, you’ll need to increase your premiums or the policy will lapse, and you’ll be responsible for the difference in taxes. If you’re going to employ policy loans, make sure to keep track of your policy values to avoid lapses and tax penalties.
Furthermore, if you die before repaying the loan, your death benefit is lowered, which might have a significant financial impact on your family during a difficult time. My wife and I are less concerned about this possibility because our girls are almost fully launched, so a lower death benefit is acceptable to us.
Another advantage of getting a permanent life insurance policy to assist pay for education is that the cash value is not currently taken into account when calculating financial aid. That means your child will get the most out of his or her assistance while you still have the life insurance coverage as a backup plan in case something goes wrong.
Can you use whole life insurance to pay for college?
You can pay for anything with the money from universal or whole life insurance, including school. Whole-life insurance policies are a particularly popular way to do this.
How is life insurance included in a plan for funding college education?
Using a whole life insurance policy to pay for college or other expenses has various advantages.
First, if the insured individual was to be responsible for all or part of the costs of education and died before doing so, the policy’s death benefit would be available to cover some or all of those costs. Because insurance funds are not considered taxable income, they can be used to pay for college expenses tax-free. If the policy is owned by someone other than the insured, it is normally excluded from their taxable estate.
Most, on the other hand, are still alive when it comes to using their insurance to pay for things like college and can borrow the most of the CSV without having to prove their creditworthiness. As with any loan, the proceeds are normally tax-free to the beneficiary, who can use the money for anything he or she wants, including paying for education.
Other advantages include the exclusion of life insurance cash surrender value as an eligible asset when calculating the expected family contribution (recently renamed “student aid index”) for need-based financial aid when completing the federal government’s Free Application for Federal Student Aid (“FAFSA”) for each year while matriculated.
As college fees become due, one should evaluate all available resources, including the CSV of one’s whole life insurance, to pay for college costs.
Can I withdraw money from my whole life insurance?
A whole life policy normally allows you to withdraw a portion of the cash value without canceling the policy. Instead, when you die, your heirs will receive a lower death benefit. On withdrawals up to the amount of premiums put into the policy, you usually won’t incur income tax. Because you are sacrificing a portion of your coverage, this option is also known as a partial cash surrender.
Does life insurance policies affect financial aid?
Cash value life insurance is not considered an asset by the FAFSA. As a result of this oversight, some insurance agents promote cash value life insurance as a means of concealing parents’ assets. There are numerous reasons why you should avoid so-called experts who make this recommendation.
“The hefty sales commissions, high premiums, low return on investment, nondeductible nature of the premiums, and surrender charges, among other difficulties, may cost the family more than they save by concealing the money from the need-analysis process,” Kantrowitz and Levy write in their guide.
Furthermore, going to such lengths to conceal assets is not only costly, but often useless.
Check out my earlier college blog post on the subject to find out why:
Another thing to remember about life insurance: payments from a policy will be counted as income.
Can you use an Iul for college?
That means you can utilize an IUL coverage to pay for education without worrying about how it will affect your financial assistance. If distributions are made to colleges outside of the United States, a 529 plan is liable to tax and penalty. There are no such limitations in IUL distributions. The majority of 529 plan investments are likely to lose money.
Whats better term or whole life?
Because term life insurance is temporary and has no cash value, it is frequently the most affordable type of life insurance. Because the coverage lasts your entire life and the policy accumulates cash value, whole life insurance rates are substantially higher.
What is a college fund?
A 529 college savings plan is a state-sponsored investment plan that allows you to put money aside for a beneficiary’s education expenditures. To cover practically any type of educational expense, you can withdraw cash tax-free. Additional state or federal tax benefits may be available through 529 accounts.
Which college savings plan is best?
There are two types of tax-advantaged college savings plans available to assist parents in paying for their children’s education: Education Savings Accounts (ESAs) and 529 Plans (also known as ESAs or Coverdell accounts).
Tax-deferred growth is available in both types of accounts. The money, including any gains and investment income, can be withdrawn tax-free as long as the proceeds are utilized to support qualified school expenditures (such as tuition, books, supplies, computers, and room and board). Moreover, unlike custodial accounts, both plans are treated as your assets rather than your child’s, reducing their impact on financial aid dramatically.
However, there are some significant variances in terms of eligibility and contribution levels.
Plans
A 529 plan is a state-sponsored, tax-advantaged mechanism to put money toward higher education costs. At least one 529 plan is available in each state, and each plan has its own program manager. State-specific plans varies in terms of pricing, program features, and investment options. To enroll in a state’s 529 plan, you do not have to live in that state. However, you should determine if your home state offers a plan that offers state tax and other benefits to its residents that are only available if you invest in the home state plan.
- Withdrawals from a 529 plan can be used to cover qualified educational costs at any eligible postsecondary school or apprenticeship program in the United States. Withdrawals of up to $10,000 can be utilized to pay for K-12 tuition. Up to $10,000 can be utilized to repay the account beneficiary’s school loans, plus additional $10,000 for each of the beneficiary’s siblings’ student loans.
- Contribution limits for 529 plans are higher than for other forms of school savings accounts.
- Investment possibilities vary each 529 plan, just like they do with 401(k)s. Each state that offers a 529 plan sets its own rules for how the plan is set up and which investment possibilities are available.
- Per beneficiary, lifetime contributions of $400,000 or more (amounts vary by state) are possible.
- If you have the funds, you can jump-start your children’s college funds by depositing up to $75,000 in a single year (a couple can invest up to $150,000) without incurring gift tax if you make a special election and the contribution is your only gift to that beneficiary for five years (the IRS views the gift as $15,000, or $30,000 for a couple, over five years).
When should you cash out a whole life insurance policy?
Most experts advise policyholders to wait at least 10 to 15 years for their policy’s cash worth to rise before using it for retirement income. Consult your life insurance agent or financial counselor to see if this strategy is appropriate for you.