Life Insurance as a Possible College Saving Tool
There are many “college savings plans” which are actually rebranded life insurance policies. Are companies trying to hide something with these products? No. They are just trying to get consumers to pay attention to another option while navigating around the bad press that life insurance has received in the past. Providers include Gerber Life Plan for College, New York Life, Met Life, American Family, and many others.
The Pros and Cons of Life Insurance as a College Savings Tool
- Ensure Student(s) Have College Money
- Cash Value does NOT Impact Financial Aid Calculations
- Can Often Borrow from Life Insurance Policy
- Poor Growth Potential
- Longer-Term College Investments
- Withdrawals ARE Considered Income
Ensure Student(s) Have College Money
Life policies nsure that the student has the needed money for college in case the parent, grandparent, aunt or uncle dies. No other financial instrument has the same power to fill financial needs when an unexpected death occurs.
Cash Value does NOT Impact Financial Aid Calculations
Cash value in a life policy does not impact financial aid calculations. Unlike practically all other types of investments, money inside the life policy is not counted on the FAFSA or CSS Profile. This can make the life policy a very effective financial aid shelter.
Can Often Borrow from Life Insurance Policy
Borrowing against a life insurance policy is a way to get cash for college, at a very low cost to you, which will not negatively impact your EFC. Borrowing against a life policy typically has net costs in the range of 0.5% to 1.5% interest, and most of that goes back into your policy. Sometimes you don’t have to pay it back at all. Also since it’s technically a loan, it is not considered income.
Poor Growth Potential
Life insurance policies do not have good growth potential. In shaky economic times, many people may like the slow, plodding, security of a life policy. But if you are looking for growth, life policies are not designed for it.
Longer-Term College Investments
Life policies are not good choices for any savings plans shorter than ten years in most cases. If you are looking for someplace to put money and take back out in the short term, the fees and penalties on life policies will often eat up any benefit.
Withdrawals ARE Considered Income
Withdrawals from a life policy are considered income by the financial aid process. Unlike loans, cash withdrawals show up on your financial aid forms and drive up your EFC. If your life policy was heavily funded up front, you run the risk of not being able to borrow money and all money coming back out of the policy will be treated as a cash withdrawal (it’s called a modified endowment contract).