Cash Value Life Insurance for College Payments

Many people look for life insurance information on cash value life insurance because of its savings potential. With this type of permanent life insurance product, you get more than just financial protectionin the event of death; you can also benefit from potential earnings that you can use for whatever purpose you need. This can include additional funds to help pay for a child’s college education when the time comes.

However, it’s important to note a few caveats when discussing cash value life insurance as a potential way to save money for college. First, it can take several years for a substantial cash value to accumulate to help with a major expense like college tuition.  Second, any accumulated cash value isn’t reportable via a FAFSA form when applying for student aid, but it does appear on College Scholarship Service Profiles (CSS profiles) so it could impact a student’s ability to get non-federal financial aid. Third, there are expenses and fees for life insurance that could impact the cash value of a policy, and finally – life insurance’s primary purpose is to protect the insured’s family via a death benefit.

Cash value life insurance is a type of permanent life insurance product that offers the potential to accumulate and grow savings while offering you lifetime financial protection through a death benefit, as long as premiums are paid. As you make premium payments, a part of it goes to paying for your coverage (cost of insurance). Then, the remaining portion is deposited into an account value amount that grows over time.

In many cases, you can use your cash value amount however you like. For example, some people use the cash value life insurance for real estate, putting their earnings towards helping buy or renovate properties.

How Long Does It Take to Build Account Value?

It typically takes at least two to five years to build account value in a cash value life insurance account. However, substantial savings will not be accrued for many years. The speed at which your savings may grow will usually depend on the type of policy you have, how much you pay in premiums, how much additional money you may pay in to the policy, and the various interest crediting options life insurance companies offer.

How Soon Can I Access My Account Value?

You can access your account value earnings as soon as you’ve grown the minimum amount required by your insurance company. As mentioned, this often takes between two to five years to build your cash value within your life insurance policy.

Is There a Limit to Account Value Amounts I Can Access?

Most life insurance companies put a cap on how much account value you get from your life insurance at a time. This limit will depend on your contract and your insurance provider, so it’s best to check the terms before taking money out. It’s also good to know any caps to avoid fees and tax liabilities. Also, even if you take a loan or make a withdrawal from your policy,  it’s important to make sure enough cash value remains in the policy to maintain it. A policyholder would need to ensure premium payments continue to be made to keep the policy in force.

Cash value life insurance can fulfill more than just providing a death benefit; it can also be a tool for college planning. Depending on when you purchase a policy, the cash value's tax-deferred status may result in a larger pool of funds when it's time to pay for education expenses. Utilizing policy loans or making withdrawals could be tax-advantageous actions that do not influence federal financial aid eligibility as heavily as traditional savings accounts. Funds from cash value life insurance are not deemed assets by the Free Application for Federal Student Aid (FAFSA), which can be helpful for families looking to minimize their Expected Family Contribution. However, it’s worth noting that the College Scholarship Service Profile does require disclosure of cash value life insurance. Therefore, non-federal financial aid could be impacted.

Cash value life insurance offers a different approach to saving for college compared to 529 plans. One advantage is its versatility; cash value life insurance doesn't confine the utilization of funds to educational expenses, which is particularly beneficial if the designated beneficiary opts not to attend college or if there are funds remaining after graduation. In such scenarios, life insurance cash values can be repurposed for other fiscal goals, such as retirement or investment opportunities, without the encumbrance of taxes or penalties typically associated with 529 plan funds used for non-educational purposes.

However, it’s important to understand the benefits of 529 plans when comparing the two. Typically, a 529 plan offers more growth potential because account holders can invest those funds in mutual funds or other investment options (though there is potentially higher risk as well given the nature of investments tied to the stock market). Life insurance policies are not investments and, with the exception of variable universal life insurance, do not allow for the investment in mutual funds or other securities. Growth potential for cash value life insurance is typically limited by a cap or other form of restriction. 529 plans are also less expensive than cash value life insurance.

You can use your cash value life insurance to pay for college through withdrawing cash value or taking a loan against the cash value. Before you do this, you should review your policy and discuss your particular situation with a licensed insurance agent

Withdrawal: This involves taking out the account value amount without promising to pay it back. This will lower the value of your earnings, which means you’ll have to build it again if you’d like to withdraw again in the future. 

Loan: This entails borrowing the account value amount with the intention to pay it back. This maintains your coverage and the rate at which your account value grows, but you’ll typically have to pay interest on the money loaned. If you do not repay the loan and pass away, your death benefit will be reduced by the amount outstanding and any interest owed.

Cash value life insurance isn’t designed as a college savings plan, but it can be a useful method to build a fund toward paying for higher education. It may make sense to use savings from a cash value life insurance product for college because: It offers flexibility, meaning you can withdraw or take a loan anytime.  Your account value amount doesn’t stop earning interest as long as you pay your premiums; this means you could earn a lifetime of interest.  Taking out money from this product doesn’t affect a student’s ability to qualify for federal financial aid.

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