top of page

How Life Insurance Fits into a College Savings Plan

Though you may not think to compare the two at first, life insurance and a college education are both tools for your family to build a better financial future. They c

an even work hand in hand — as the cost of higher education goes through the roof, a life insurance policy can serve an important role as part of a college savings plan for your children and loved ones.

The Two-Part Tuition Strategy for Life Insurance

The right life insurance policy can serve as a two-part tuition strategy to help pay for your child’s education. First and foremost, life insurance is always about protecting against the unexpected. The death benefit is designed to protect your family’s financial plan in the face of untimely death, which means it can effectively complete a college funding plan for your beneficiary should the unthinkable happen.

But that same policy can also help you save for college while you are still alive. The second part of the strategy comes through the combined potential for tax-deferred accumulation of cash value, tax-free distributions, and living benefit protections that can be

included in certain policies.

The right life insurance policy can serve as a two-part tuition strategy to help pay for your child’s education.

Cash value in life insurance generally grows tax deferred and uses the power of indexed funds to protect against market downturns. It provides principal protection for your savings and lets you withdraw from your cash value tax free up to the amount you have paid into the policy. Cash value distributions are not considered an asset for federal financial aid calculations, yet they can be put toward your child’s tuition and educational expenses.

Additionally, if your policy contains living benefits, you would be protected from chronic or terminal illness and critical injury. Living benefits are like an advance of your death benefit that is provided income tax free should your health decline to such a state. These benefits can be used for any expenses you need to be paid during your illness or injury, including the payments of your child's tuition, further supplementing their college savings plan.

"Cash value distributions are not considered an asset for federal financial aid calculations."

How Life Insurance Compares to the 529

Consider the 529 plan compared to a life insurance policy regarding college savings. With both a 529 and life insurance, you get tax-deferred growth, but only with life insurance do you get tax-free distributions to apply to any educational expenses — a 529 plan only provides tax-free distributions for qualifying expenses and typically includes a 10% penalty if the funds are not used as such.

Furthermore, the 529 is open to market risk, while an indexed life insurance policy has downside protection from market performance. Life insurance also includes the flexibility to use the funds for expenses other than higher education should your child decide not to go to college or choose to leave before finishing their degree. Finally, life insurance provides benefits outside of educational expenses that 529 plans cannot, such as death and living benefits, making it the perfect multi-tool for your family’s financial security.

The Sooner, The Better

Regardless of how you save for your child's education, the sooner you begin, the more certain you will be that you can afford their tuition and educational expenses. But while 529 plans and personal savings are great tools to get your child where they need to be to get their diploma, only life insurance offers the flexibility and additional benefits that can protect you and your family's legacy in the process. Talk to your life insurance agent today for more information on this powerful college savings tool.


bottom of page