When most people think about saving for college, life insurance isn’t the first option that comes to mind—but it can be a powerful, flexible tool for funding higher education. For families looking to supplement traditional college savings strategies, the cash value in a permanent life insurance policy offers a unique combination of tax efficiency, financial aid benefits, and adaptability.
Here’s how it works—and why it might be worth exploring as part of your overall college funding strategy.
Why Consider Life Insurance for Education Savings?
Preserves eligibility for financial aid
Unlike many other savings vehicles, the cash value in a life insurance policy is not counted toward your expected family contribution on the FAFSA. It also doesn’t count as a student asset. That means using life insurance can help preserve your student’s eligibility for need-based federal aid.
More flexibility than traditional education accounts
529 plans and Coverdell accounts offer tax advantages—but they’re limited to qualified education expenses. If your child takes a gap year, joins the military, or chooses a different path altogether, those funds could be restricted or penalized. Life insurance cash value, on the other hand, can be used for anything—no penalties, no questions asked.
Built-in protection if you become disabled
Some policies offer a disability waiver or rider, which ensures that premiums continue to be paid—even if you're unable to work. That means your college savings plan won’t be derailed if life throws you a curveball.
How Life Insurance Loans Work
Life insurance loans allow you to borrow against the cash value of your policy—typically without taxes or a credit check. The loan doesn’t show up on a FAFSA and won’t affect your student’s financial aid eligibility. Plus, there’s no required repayment schedule. If unpaid, the loan balance (plus interest) is simply deducted from the death benefit later.
Tips for Maximizing Cash Value
Not all life insurance policies are designed for college planning. Here’s how to make the strategy work:
- Choose a permanent policy. Term policies do not accumulate cash value.
- Buy early. Premiums are lower when you're younger and healthier, and the policy has more time to grow.
- Overfund it. Contribute more than the minimum to accelerate cash value growth.
- Add a term rider. Start with a lower base death benefit and add a term insurance rider to increase affordability while children are young.
- Maintain the policy. This strategy works best for families who can comfortably keep the policy in force long term.
The Bottom Line
Life insurance doesn’t have to replace other college funding tools—it can complement them. Used alongside 529 plans, personal savings, and financial aid, a properly structured life insurance policy can offer a flexible and resilient way to support your child's or grandchild’s future.
Want to explore if this strategy could work for your family? Give us a call today.
