iQuanti: College expenses can add up fast, and there are many different strategies for covering those expenses. If you have a permanent life insurance policy with a cash value component, it can do even more than protect your family with a generous death benefit while your children are young. When your kids reach college age, it can be part of your financial planning to cover college expenses in addition to traditional saving methods like a 529 savings plan.
Unique features of life insurance
Life insurance can be a component of your financial plan to pay for college expenses because it has unique features:
1. Life insurance doesn't count as an asset
When you apply for financial aid, you will be asked to provide information about your income and assets so that schools and/or the federal government can determine how much college expenses you can afford. Savings in a 529 plan are counted as an asset if you apply for financial aid, whereas life insurance cash value is not.
2. Cash value can apply to anything
The money in a 529 plan must be used for college expenses or it is subject to steep tax penalties, but life insurance cash value can be used for anything, which makes it a great supplementary component of your overall financial plan. In the event that your child decides not to go to college, if their expenses are covered by a scholarship, or if they need access to cash in an emergency, life insurance cash value can come in handy.
How to access cash value in a life insurance policy
There are three main ways to draw on the money in a cash value policy:
1. Take out a loan against the value of your life insurance policy
You pay the life insurance loan back in full in order to restore the value of your policy, plus any fees and interest on the loan charged by the insurer. The policy's death benefit will be reduced while there is an outstanding loan, and if you pass away before it's paid back, the beneficiaries will receive a reduced death benefit.
If you don't pay the loan back, the balance will continue to grow as interest is compounded; if the loan becomes larger than the cash value balance, the policy will lapse and you will owe taxes on any cash value accumulation beyond what you've paid in premiums (gains).
2. Withdraw cash value
You can withdraw a portion of the cash value, although be aware that you will owe tax on any gains that you take out of the policy. In this instance, you don't intend to pay the money back, and the death benefit will be reduced.
3. Surrender the policy for the available cash value
Surrendering the policy means you cancel it for good, and you receive the policy's cash value, less any fees charged by the insurer. This option is not common, as most people want to keep a life insurance policy active while their children are in college so that their child will receive a death benefit in the event that something happens to their parents. You will owe taxes on any gains, so you may want to consult with a tax advisor before making this choice.
The bottom line
Life insurance can be a useful component of your overall college savings plan. If you no longer need the full death benefit, it may be a good idea to use life insurance savings as a supplement to traditional college savings plans like a 529 rather than replacing them.
When considering any of these options, you should contact your insurance company to confirm how much cash value you have available and what fees would apply if you tapped into it, as well as how it will impact the death benefit of your policy. A financial advisor can best help you evaluate your specific options.
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Original Source: How to Use Your Life Insurance to Help Pay Your Child's College Expenses