Can You Use Life Insurance to Pay For College?

Apr 6, 2020 by

Whether your kids are 5 or 15, there is one impending expense that’s nagging at the back of your mind — college.  Let’s face it — college is freaking expensive. Over the last 12 years, tuition costs have grown by 63%, and students are looking at some seriously frugal savings during their formative years or taking out some enormous student loans to pay for their education if they choose to seek out a college degree. You can start saving money the day that they’re born, but as the cost for college keeps going up, there’s no guarantee that what you start saving today will even be enough 10 or 15 years from now.

Now, you might already have a life insurance policy. It’s a good rule of thumb if you have kids, that way your spouse and children are protected if anything untoward should happen to you.  What a lot of people don’t realize is that you might be able to use that life insurance policy to help pay for college — without dying. 

Choosing the Right Life Insurance Policy

It’s important to note that not every life insurance policy will be suitable for this kind of strategy.  A policy that provides a fixed payout won’t give you the opportunity to earn cash value within the confines of the policy.  We’ll look deeper into the concept of cash value in a moment. 

If you’re planning to use your life insurance policy as a tool to help support the costs of going to college for your kids, you’ll need to invest in a permanent life insurance policy.  These are ones that you pay into throughout your life.  Part of the cost of your monthly policy payments goes into paying for death benefits and other things that come with life insurance, and the rest goes toward building a tax-deferred cash value that accumulates over the years. 

Make sure that you choose a policy that gives you the option to build cash value.  Not all permanent life insurance policies will so make sure you read the fine print 

Understanding Cash Value

When you choose a cash value life insurance account, you’re essentially creating a pool that you can borrow against in the future while still securing death benefits that might become necessary if you or your spouse pass away during the course of the policy.

The reason that many people choose this type of life insurance policy is that it gives them a growing fund that they can withdraw or request a loan against.  

Again, read your fine print before you choose a policy. If your policy doesn’t allow withdrawals or loans against the cash value of your life insurance, or limits those amounts to a few hundred dollars at a time, it won’t be a policy that you can use to pay for college. 

Using Life Insurance to Pay For College

If you have been paying into a cash value life insurance policy for a long period of time, you may have accumulated a large pool that you can borrow against to help supplement your child’s college fund. You do still have to pay the loan back, but borrowing against your life insurance policy doesn’t count when you’re adding up assets to determine if your child qualifies for financial aid, making it a fantastic source of supplementary funding. 

While you’re borrowing against your life insurance, you may wish to consider taking a policy out for your college student as well.  While no one wants to think about needing a life insurance policy for their child, if they are obtaining student loans to fund part or all of their college education, if something does happen you could find yourself responsible for the full amount of their loans as a cosigner. Life insurance goes both ways and it can help to protect you as well as your children.

A Few Warnings to Consider

Borrowing against a cash value loan isn’t something that should be done lightly, and there are a few things that you should keep in mind if you decide to go this route to help fund your children through their educational endeavors. 

First, if you borrow against your life insurance policy, it could cause the policy to lapse if you borrow for more than the total cash value of the account.  If it lapses, you’ll be responsible for any taxes on the amount, and you’ll lose the death benefits that you’ve been paying into for so long.

If you do happen to pass away before you’ve repaid the loan, it will reduce the total death benefits that your family receives  You have to weigh the pros and cons but if your children are grown and ready to head out on their own, reducing your death benefits might be a pro, if it means that your children aren’t saddled with tens of thousands of dollars in student loans when they graduate.

Looking Toward the Future

Paying for college is terrifying especially since costs keep going up.  You either leave your new adult saddled with lots of student loans or end up taking out loans yourself.  Borrowing against a permanent cash value life insurance policy might be an option that you might not have considered otherwise.  Can you use life insurance to pay for college? The answer is yes, under certain circumstances.

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