Wednesday, June 22, 2022

How To Use Whole Life Insurance To Pay For College

Don't Miss

Can I Take The Cash Value Of My Life Insurance

How to Use Whole Life Insurance to Pay For College

You can withdraw money or take a loan against your cash value and use the money for anything you like. If you decide to terminate the policy, you can take the cash value .

Keep in mind, if you withdraw money from the cash value and the amount you withdraw includes interest or investment gains , you will be taxed on that portion of the withdrawal.

Additional Life Insurance Premiums

The policy must remain in force which often means the premiums must continue to be paid, in addition to any loan payments. The net cost of such premiums due may rise given the policy dividends, which may have been applied to pay some or all of the premium, are reduced or eliminated due to the outstanding loan. This means more financial obligations on the family contributing to more financial stress.

When Does It Make Sense To Purchase A Cash Value Policy

While term life insurance is generally plenty of coverage for most people, cash value life insurance is useful under a few circumstances. For starters, these policies only make sense for those who can afford them. The premiums can be much higher than the same amount of term life insurance because of the cash value feature and policy fees.

A cash value insurance policy could be a good option for high-income earners who have maxed out retirement account contributions and want an additional account for tax-deferred savings.

Some high net-worth individuals use cash value policies to help their heirs pay estate taxes.

You May Like: Does Geico Offer Pet Insurance

The Traditional Methods Of Saving For College

In most cases, people turn to bank savings account and other types of traditional investment vehicles when setting aside funds to save for a childs future education. Yet, as these funds grow, the interest that is earned is typically considered to be taxable as income and, because of this, it will decrease the actual growth that is achieved on these savings.

Many people will pay the tax that is due with the funds that are received from their current income or, they end up withdrawing some of the interest that was earned in order to pay the amount that is due. In either instance, the result is essentially the same.

Are Cosigners Responsible For Student Loan Debt

How to Use Whole Life Insurance to Save for College

With private student loans, cosigners may be on the hook for your student loan debt if you pass away. If your lender doesnt offer student loan death forgiveness, you can generally expect that whoever cosigned your loan will be responsible for the debt.

For federal loans, things get a little tricky. If one of your parents cosigned a federal parent PLUS loan, the debt is discharged in the event of either your or their passing. If both parents cosigned this loan and only one of them passes away, the other parent is still responsible for the debt if you are still alive, too.

Read Also: Do Parking Tickets Affect Car Insurance

The Best Type Of Policy For Funding Your Child’s Education

If you purchase a to act as a source for funding your child’s education, you must purchase a cash-value policy. Since term life insurance has no savings vehicle, it can’t be used as a source for money without seriously decreasing its death benefit. With a cash-value life insurance policy, you can use the savings component to save money for college expenses and the death benefit component to secure the funds needed for your child’s education in case of your premature death. With this approach you use your policy to its fullest potential.Another option insurance agents suggest for funding a child’s education is to purchase a cash-value life insurance policy insuring your child. Although there are advantages to this method – your child is guaranteed insurability for life under the policy as long as the premiums are paid on time and the value of the policy is not required to be reported to the financial aid office, thereby possibly increasing the amount of money the college gives your child – these advantages don’t really pay off in the long run. The financial aid increase can be negligible and the risk of not being insurable later in life isn’t great enough to merit the extra cost. We suggest you stick to insuring yourself.

Sometimes There Are Better Solutions

There may be situations where whole life insurance wont work for you. Its best to use whole life as a college savings option when the child is young. That way your policy can build enough cash value to help properly cover college expenses. You can use whats called an optional paid-up additions rider to significantly add to the early build-up of cash values in your policy. But if that first tuition bill is coming up soon, whole life insurance may not be the solution for you.

Compare to see if using permanent life insurance is a college savings solution for you and then talk to your financial professional.

Also Check: Does Insurance Go Up For Windshield Replacement

The Possibility Of Using A Whole Life Insurance Policy

If you have already chosen a whole life insurance plan, then you need to know your options available with your policy. Tapping into a whole life insurance policy could be a consideration if the policy has been in place for several years.

But be warned. If you choose to use the cash value of your policy to help fund a college education, you need to make sure you understand the fees associated with withdrawal. There could also be a potential tax penalty if you withdraw from your policy prior to age 59 ½.

How 529 Plans Work

Why Whole Life Insurance Is Best for College Funding : Life Insurance Topics

State-run 529 plans are similar to a Roth 401 or Roth IRA, but are intended for education rather than retirement savings. Through a 529 savings plan, you can invest in a selection of mutual funds, and your earnings will grow tax-deferred. As long as you use the money for what the IRS considers qualified education-related expenses, your withdrawals will be tax-free.

Most states also offer a state tax deduction or for your contributions to their plans, which only adds to their appeal. Unfortunately, there is no federal deduction or credit for your contributions.

While the 529 is in some ways the gold standard when it comes to putting away money for college, its not the only path that offers tax benefits. Another option is to take out a permanent life insurance policy, which, unlike term life coverage, has a tax-deferred savings component.

You May Like: Does My Car Insurance Cover Broken Windows

Notes Of Caution About Cash Value Policies

Because some policies take a long time to build up any significant cash value, you could wait decades before you have a substantial amount to access. Other policies are designed to build up cash value more rapidly in the early years of the policy.

When you pass away, any cash value will usually revert to the life insurance company. Your beneficiaries receive the policys death benefit amount, minus any loans and withdrawals of cash value you made. Typically beneficiaries do not receive the death benefit plus cash value. For example, if you had $1 million in coverage and an outstanding loan of $20,000, your beneficiaries would receive $980,000.

Some companies offer the option for beneficiaries to receive the death benefit plus cash value, for higher premium payments.

If you need life insurance because you want to cover a specific debt or certain amount of time, look at term life insurance. It doesnt offer a cash value component but it will pay out a death benefit amount of your choosing if you pass away during the policys term, such as 10, 20 or 30 years.

Term life insurance is ideal for covering the years youre paying a mortgage, or the years until your children are expected to be financially independent. And it wont cost you an arm and a leg like some forms of permanent life insurance. If you dont need insurance for the duration of your life, term life insurance will give you more bang for your buck.

Control Of The Account

The 529 account owner maintains control over their account at all times, including immediate access to all amounts contributed, plus any earnings and net of any investment losses. They have access to over 100 plans and thousands of investment options and can change ownership of the account of most plans at any time. There is no period of years required but rather the 529 account owner can choose to access their funds at any time, either for a tax-free distribution for qualified educational expenses or any other purpose with the earnings thereon subject to tax and an additional tax penalty of 10% of such earnings.

Also Check: Does My Car Insurance Cover Broken Windows

Saving For A College Education With Life Insurance

With the increased cost of college tuition, parents are finding it more and more difficult to meet tuition payments. Among other saving tools, many are using life insurance as a means to afford higher education expenses. To learn more about how you can utilize this feature of life insurance, read on.This page:Describes how to use a policy for your child’s education funding.Recommends the right type of policy for effective college savings.

Insure The Parent Not The Child

429  Should I Use Whole Life Insurance as a College ...

This one trips a lot of people up, but if you are seeking whole life insurance to pay for college I strongly recommend against insuring your child for this purpose. I know you probably thought that because you are doing this for the benefit of paying for a child’s education it probably made a lot of sense for this to be a whole life policy insuring the child.

But this approach has a lot of pitfalls and drawbacks. Most importantly, if the child is the insured and a parent dies, then the child has a whole life policy with a premium due. If on the other hand, the whole life policy insures the parent and that parent dies, the death benefit solves the college funding problem.

Additionally, whole life policies issued on children often cannot accommodate the premium size necessary to accumulate the cash value needed to ultimately pay for college. Given their very young age, a seemingly small amount of premium can create a large amount of death benefit that goes way beyond the levels of reasonableness for death benefit on a child.

Life insurance companies are very hesitant to issue high death benefit amounts on a child and this restriction/limitation causes a serious impediment to accumulate lots of cash value in the whole life policy. Remember, the cash value is the key component of using whole life insurance to pay for college.

Also Check: Will Parking Tickets Raise Insurance

What Is Permanent Life Insurance

Permanent life insurance is a type of life insurance that does not expire, meaning that as long as a policyholder pays the premium, the policy is active and the death benefit will be paid out to their beneficiaries regardless of when they die.

These policies include a savings or investment component that builds cash value. The policyholder can borrow money against these savings or withdraw money from the account during their life, although outstanding loans at the time of death and withdrawals will lower the death benefit amount.

Whole Life Insurance For College

How to Use Whole Life Insurance to Pay For College
529 Savings Plan vs. Whole Life Insurance vs. ROTH IRA…
Whole Life 4 College & Beyond
Why Whole Life Insurance Is Best for College Funding :…
College Savings: Whole Life Insurance vs. 529 Plan
529 Plans vs Investment Grade Whole Life for Education…

You May Like: Life Insurance Licensing Exam

Coverdell Education Savings Accounts

Also known as ESAs, these accounts allow you to save up to $2,000 each year for each child. This is a tax-free account, and the funds dont have to be used for college. Savings can be used to pay for college or any K-12 expenses. Contributions can be made until your child reaches age 18 and must be spent before the child turns 30.

What Are The Cons Of A 529 Plan

Whole Life 4 College & Beyond (using infinite banking)

While a 529 plan has several benefits, there are also some disadvantages. These include:

  • Strict rules about usage The savings that you accumulate must be used to pay for qualified education expenses. If you use the funds for something else, youll be charged a 10% penalty.
  • Laws vary by state Each state has its own laws about 529 plans. If you move to a different state, its possible that income tax deductions and credits will be subject to recapture in the new state.
  • Fees Like most investments, 529 plans have fees. The fees are taken from your contributions, so the higher the fees, the less funds will go to your actual savings account. Its important to take a little time and search for a 529 plan with low fees.
  • Financial aid The savings in a 529 plan count as an asset when your child applies for financial aid for college. The actual impact is greater if your child is the owner of the account, and a little less if you own the account. Either way, 529 ownership has the potential to detract from the financial aid your child qualifies for.

Recommended Reading: Does My Car Insurance Cover Broken Windows

Benefits Of Life Insurance To Pay College Expenses

There are several benefits to using a whole life insurance policy to pay for college, or other expenses.

First, if the insured individual was to be responsible to pay all or some of the costs of college and they passed away before doing so, the death benefit paid on the policy would be available to pay some or all of such costs. The receipt of insurance proceeds is not considered taxable income making the opportunity to pay education costs tax-free. If one other than the insured owns the policy, such asset is also generally excluded from their taxable estate.

Most, however, are alive when accessing their policy to pay for expenses such as college and can borrow most of the CSV without proving any credit worthiness. As true with any loan, the proceeds are usually tax-free to the recipient, who is able to apply such funds to any purpose, including paying college costs.

Other benefits include the exclusion of life insurance cash surrender value as an eligible asset when determining the expected family contribution for need-based financial aid when submitting the federal governments form, Free Application for Federal Student Aid , for each year while matriculated.

Thus, as college costs become due, one should consider all available resources to pay for college costs including the CSV of ones whole life insurance.

Are Spouses Responsible For Student Loan Debt

If you pass away and your spouse is still alive, they may be responsible if your state classifies student loan debt as shared marital or community property even if they didnt cosign the loans. If you take out a loan while married in one of these states, the loan is considered to be owned by both you and your partner. There are currently nine community property states:

  • Arizona

Read Also: Do Parking Tickets Affect Car Insurance

Friends And Family Can Contribute

We all know grandparents and other family members love to buy impractical gifts for your kids its almost a rite of passage. However, if your family members ever ask your opinion on a gift, then encourage them to contribute to a 529 plan.

Simply adding $25 to the account each year can make a meaningful difference over the life of the account. Contributing to a 529 plan is an easy way for everyone to get involved with helping towards the cost of education.

You will now find several mass retailers who carry gift cards which can be used to contribute to a 529. Your kid might not appreciate the gesture as much as you do, but the gift cards make it even easier to add money to the plan.

Advantages Of Fiul As Part Of A College Funding Strategy

Pay for Your Whole Life Insurance Using Policy Dividends ...

FIUL offers a powerful combination of three tax advantages:

  • A generally income-tax-free death benefit
  • Tax-deferred accumulation potential

Flexibility and control

The policy’s available cash value has the ability to be accessed for any purpose the policyholder chooses. So if plans change down the road and the child does not go to college, the policyholder can access the cash value for other needs.

No eligibility requirements

With life insurance, there are no complex eligibility requirements or income limits to consider. And under current rules, the money received from policy loans generally wont affect the students eligibility for other financial aid.2

You May Like: Does Comprehensive Insurance Cover Windshield Replacement

A Focus Beyond Just Paying For College

Whole life insurance often comes up as an option to pay for college because it:

  • Has solid and reliable returns that will allow you to accumulate the cash you need to cover college expenses.
  • Allows you to accumulate large sums of money that most colleges will never consider when determining your eligibility for financial aid.
  • Permits you to withdraw large sums of money from the policy to pay for college with zero tax consequences.
  • However, whole life insurance can pay for college and provides funds for so much more. When using whole life in this capacity, you can unlock some serious benefits afforded by life insurance and achieve an effective rate of return that is the envy of a lot of other financial savings products.

    This is just one of the many benefits you get as part of owning the right whole life insurance policy. We explain more in our book Predictable Profits.

    More articles

    Popular Articles