Did you know you can use a life insurance policy as a college savings plan? It's true! This is one of the best-kept financial secrets that I wish wasn't so secret.
There are a few things you need to know in order to make this strategy effective. First, you need the right type of life insurance policy, and you need to buy it as early as you can. I can help you get everything set up to maximize the financial benefits for you and your student - especially when it comes time to apply for financial aid!
Permanent Life Insurance: A Quick Overview
This kind of life insurance covers you for your entire life. No term, no expiration, no nothing. As long as you keep the policy in force by making payments, your family is guaranteed to receive a death benefit when you pass away.
But there's another feature, too. In addition to funding your policy, your payments also fund a cash value account. That account grows in value over time, thanks to either interest or an investment in an index market (depending on the kind of policy you get). The longer you have your policy, the more your cash value grows. You can pull any of this cash value out of the account, up to the amount you've paid in premiums, without any tax penalties at all.
Get the Most for Your Money
If you insure yourself when your child is young, your cash value could help send them to college. But that's not all:
- Unlike a college savings plan, life insurance pays out if you pass away before your child goes to college. For example, if Jim passes away when his daughter Mary is only 5, the next 13 years are ones he's not there to support her or keep contributing to her college fund. If Jim passes away and has life insurance, Mary can still afford to go to college, thanks to the death benefit.
- Cash value has no restriction on its uses. You can help your child with living expenses, buy them a computer and other supplies, buy them a car, and more. Educational savings accounts like 529s or Coverdell accounts have strict rules on what you can and can't use that money for.
- Permanent life insurance won't count against you when it comes time to apply for federal student aid. It's one of the few types of assets that cannot be counted as part of your assets and income, which can open up more doors for your student to apply for aid and scholarships.
Let's also not overlook the single most important reason to buy a life insurance policy: the financial security and peace of mind it brings you loved ones.