If you're considering using life insurance as a way to help pay for your child's college education, congratulations! You're on the right track for a safe, solid financial plan that takes care of you and your future Ivy League graduate.
One of the best reasons to use permanent life insurance to pay for college is because it won't count against you in student aid eligibility calculations.
Eligibility: Assets & Income
When it comes time to fill out a FAFSA (Free Application for Federal Student Aid), you'll get very familiar with terms like "expected contribution." Federal and private aid institutions almost always use a standardized calculation to figure out what your student's expected needs will be. They begin with the cost of tuition, and deduct what they think you and your student can afford to pay. But did you know that some investments count against you in the asset column?
The formula for calculating how much you can afford to help pay for college takes the following factors into account:
- 20% of your student's cash, investments, and real estate
- 2.6% - 5.6% of your own cash, investments, and real estate (with some exceptions)
- 50% of your student's current income
- 22% - 47% of your income (with some allowances)
How Does Life Insurance Enter the Picture?
Permanent life insurance, with the cash value it develops over time, can help pay for your child's tuition without counting as an asset. Along with your home's equity, life insurance and annuities are excluded from your assets when calculating your family's EFC (expected family contribution).
Many parents hope to get around these asset calculations by opening a 529 plan or Coverdell account for their student. These accounts let you sock away money earmarked for college expenses, with the opportunity to invest that money to earn even more. However, if you own the account, up to 5.6% of its value counts as an asset. It might not seem like much, but that 5.6% could mean the difference between qualifying for grants and scholarships or only qualifying for student loans.
Of course, the most important reason to include life insurance in your financial plan is because of the peace of mind and security it brings you loved ones. Don't lose sight of that as you're looking for college funding options for the kids.