Parents planning for their kids' education sometimes hear that life insurance can help pay for college. It can play a role for some families, but it's important to understand how it works and what it costs.
How it works
Permanent life insurance, like whole life or indexed universal life (IUL), builds cash value over time. Later, you may be able to borrow against that cash value or withdraw part of it, and that money can be used for anything, including tuition.
Possible advantages
- Protection and savings in one. If a parent passes away, the death benefit can help fund the child's future. A college account alone can't do that.
- Flexibility. Cash value isn't limited to education. If your child gets a scholarship or skips college, the money can be used for something else.
- Financial aid. Cash value in a life insurance policy generally isn't reported as an asset on the FAFSA. Rules can change, so confirm with a financial aid professional.
The trade-offs
- It takes time. Cash value builds slowly in the early years, so it works best when started early.
- Costs and fees. Permanent policies cost more than term, and part of every premium pays for insurance and fees.
- Loans aren't free. Policy loans accrue interest and reduce the death benefit if not repaid. A policy can lapse if loans grow too large, which can create a tax bill.
- IUL has limits. IUL growth is tied to a market index with a cap on the upside and a floor on the downside. You don't get the full market return.
How it compares with a 529 plan
A 529 plan is built specifically for education. Earnings can grow tax-free when used for qualified education costs, and some states offer added benefits. It doesn't provide a death benefit. Many families use both: a 529 for dedicated education savings and life insurance to protect the plan if a parent isn't there.
Bottom line
Life insurance can be one piece of a college plan, especially when you also need protection for your family. It shouldn't be the only piece. A licensed advisor can show you illustrations, and a tax professional can help you weigh the options.
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