If an unfortunate incident that leads to death happens to you, life insurance can be used to provide support to your family with death benefits. A type of life insurance known as permanent life insurance could gain a cash value that you can either withdraw or borrow while still alive. However, can you use life insurance for college savings? There are some common advantages and disadvantages to think about when using this policy. Moreover, it’s advisable to consult your financial advisor.
This individual can assist you in choosing an ideal strategy to use life insurance for college savings. A permanent life insurance policy can be beneficial for saving for college or reducing future expenses, depending on the policy’s value and early withdrawal. Whole life insurance offers assured cash value returns, financial aid eligibility, and borrowing funds. You can use this for purposes beyond college attendance, provided you borrow against an account.
Can You Use Life Insurance for College Savings?
Yes, you can make use of life insurance for college savings if you have cash value. In addition, there are three ideal strategies for using life insurance for college savings. The following includes;
- Borrow from your cash value.
- Withdraw money from life insurance
- Surrender your coverage
If you borrow money from your policy, you borrow a high sum of funds against the cash value. Moreover, it might not be necessary to pay off a loan when you are still alive. However, the outstanding loan debt will be collected from your death benefit, and your beneficiaries will receive the remaining amount if you die.
Also, you can decide to withdraw money instead if your life insurance coverage does not offer you the loan. A withdrawal process will enable you to obtain money for college expenses and other related bills. Additionally, when it’s time to pay for a claim, the sum amount will be deducted from your death benefit.
The last procedure is to surrender your coverage in exchange for its cash value. However, your life insurance coverage will be canceled, and you might not have any coverage if you surrender. Moreover, you can decide to use life insurance for college savings if you have additional coverage if you intend to use this option. Also, you can use this last strategy if you know you have enough assets that make your policy not needed.
How Using Life Insurance for College Savings Works
If you pay in some amount of dollars into your premium, a part of it goes to your death benefit and another part goes to a separate cash value account. From the perspective of investors, whole life insurance is considered the safest type of permanent life insurance. However, it could be beneficial if the investment performs effectively after the issuer pays your account with an assured amount.
After the initial years, some policyholders would require an exchange of anywhere from 3% to 6%. Meanwhile, the finance in the cash value account accumulates tax-deferred, similar to a 529 plan. Another kind of permanent coverage, like variable life insurance, offers policyholders an amount of management over their investment. In such conditions, you choose the sub-accounts for mutual funds that you can combine with your coverage. And then your account’s annual return is pinned to the effectiveness of underlying investments.
Furthermore, if your kid is about to begin college, you can get a loan contrary to your cash value account. Moreover, the insurance provider will deduct the amount of loan borrowed from your death benefit if you fail to pay off debt. However, this process is not a disadvantage if you consider using life insurance as a college savings policy.
Advantages of Using Life Insurance for College Savings
Life insurance has several advantages if compared with a 529 plan. For instance, if your child refuses to attend college, the policy will provide flexibility to the situation. Also, any amount you earn in your 529 account but is not your investment will be considered ordinary income tax rates, and you get a 10% tax penalty if you choose to withdraw it.
Moreover, some policies can enable the beneficiary to collect money despite being in a lower tax bracket. However, it’s still a big tax hit that policyholders do not have to experience it. Furthermore, another benefit of this policy is that it’s not added to financial aid estimations.
Disadvantages of Using Life Insurance for College Savings
Some less appealing aspects of permanent life insurance include one-time and ongoing costs that can make stock and bond fund fees seem like a good deal. For instance, the insurance representative’s commission usually accounts for at least 50% of your first-year rates. You’re beginning from a bottomless hole as a result. Your cash value may not increase over the amount of premiums you have paid for ten years or longer. Therefore, purchasing life insurance can help accumulate assets for tuition costs, but it’s difficult to argue unless done before kindergarten for children.
What is a 529 Plan?
A 529 plan is a tax-advantaged account that allows holders to use the money for authorized school costs and generates interest or returns. 529 plans consist of two categories: prepaid tuition programs and savings plans, which do not include state and federal income taxes.
Prepaid tuition plans are less frequent than savings plans. The account holder invests in specific mutual funds of their choice through a savings plan. They can use their savings for authorized college and K-12 costs, like tuition and lodging and board, after they have withdrawn them. Not all states provide prepaid tuition programs and those that do vary in what they offer. Generally, account holders purchase credits from participating public colleges in their home state, agreeing to lock in the current tuition rate for future usage.