The cost of a college education continues to rise. And with rising prices, parents are looking for new ways to help kids pay for school. Life insurance is a less well-known tactic to give college students a financial aid advantage. Here’s what you need to know about how permanent life insurance works and how it can give college students a financial aid advantage.
How does permanent life insurance work?
Permanent life insurance is a lifelong insurance option that offers a death benefit payout plus the ability to accrue cash value. There are two main types of permanent life policies: whole life and universal life. These two types of policies vary in how cash value can be accrued and invested.
With any life insurance policy, you’ll pay premiums in exchange for coverage. In a permanent life insurance policy, part of that premium payment goes to creating cash value. Then, you have multiple options for that cash value, which can include:
- Keeping the cash value in the account. This can allow you to create a higher death benefit payout when you pass.
- Using that cash value during your life by taking out a loan. You’d then be responsible for repaying the loan plus interest. And failure to do so before you pass means the death benefit payout will be decreased accordingly.
- Taking out cash value via a withdrawal. That means there’s nothing to pay back and you’re accepting the decrease in death benefit.
- Surrendering the policy to obtain the total cash value. This option means your policy will cease to exist, and you’ll no longer have lifelong coverage. You may also need to pay surrender charges to the insurer, which will decrease the amount you receive.
Is permanent life insurance considered in financial aid reviews?
When determining eligibility for financial aid, reviewers look at multiple criteria. But the most important one to consider when it comes to permanent life insurance is financial need. Students must demonstrate financial need to receive aid. And the need is determined by looking at the difference between the cost of the school kids want to attend and the expected family contribution.
The expected family contribution takes into account:
- Taxed and untaxed income
- Assets (like cash, savings and checking accounts, investments, real estate, businesses)
- Benefits (like Social Security or unemployment)
- Family size
- Number of family members attending college during the school year
Note that permanent life insurance is not considered an asset in financial aid review. And that’s why many insurance companies are quick to point it out as an option to help pay for college.
It’s worth noting that while permanent life insurance policies have the benefit of accruing cash value, term life insurance policies don’t have that. So, term life insurance policies may be a wise move to provide financial protection for loved ones via a death benefit payout. But keep in mind that this kind of life insurance may not hold any weight when it comes to helping pay for college.
How to use permanent life insurance to pay for college
If you plan to use a permanent life insurance policy to pay for college, the most important thing is to start it when your children are young. With many policies, the first ten years of premium payments go toward establishing cash value. So, you may need to hold a permanent life insurance policy for years before you have significant cash value accrued that can pay for education.
Before you remove any money from the policy, it’s smart to work with your insurer or a financial professional to consider the fees, taxes, and other implications. A professional can help you decide if it’s best to take a loan, withdraw, or surrender the policy altogether.
The bottom line
With the cost of college reaching new highs, parents are looking for ways to help out. And a permanent life insurance policy is one option to consider. Since it’s not considered in existing financial aid calculations, using a permanent life insurance policy to help pay for college could still allow your children to receive the financial aid they need. But it’s also wise to consider options like a 529 savings plan and work with a financial professional before making any big money moves.