How much do you know about life insurance?
Life insurance can give a sum of money to the designated beneficiary after the death of policyholder. Before that, the policyholder should pay premiums every year.
But that’s not all. Do you know that a life insurance can pay for college?
A permanent life insurance, which has a tax-deferred savings component, works as a college savings vehicle. Every time you pay premiums, most money goes into the death benefit. There’s a potion of premium goes to a separate cash value account.
Policyholders are allowed to take out a policy loan from the cash value account to pay for the college education. The money you borrow is income tax free, but it has to be paid back with interests.
Advantages of using life insurance for college
Compared with a 529 plan, the biggest advantage of life insurance is flexibility. If your child decides not to go to college, you’ll be facing a 10% penalty if you want to withdraw the money in your 529 account. By contrast, the money you withdraw from your cash value account of a life insurance can be used for any purposes, even a down payment on a house is OK.
Another advantage is that it is not included in financial aid calculations. Thus, it won’t affect the student’s application for financial aid. By contrast, the money in a 529 plan is considered as parental asset, which will be counted in the student’s Expected Family Contribution.
Disadvantages of using life insurance for college
There are also disadvantages using life insurance for college. The cash value accumulation is low during the first several years is low, because the majority of premiums are covered by the cost of insurance and fees. It may take you 10 years to make compound interest grow meaningfully. Therefor, you should buy a life insurance policy early. The older you are, the more likely that the cost of premiums will outweigh benefits.
Life insurance gives another way to save for college for your kids. It is neither the only way, nor the best way. Every case is unique, you still have to make your decision that’s best for you and your family.