If you have whole life insurance, universal life insurance, or another type of permanent life insurance policy, it could help with college costs.
Your life insurance policy benefits aren't always limited to being used after you pass on. If you have a permanent life insurance policy, you may be able to tap into your benefits now for numerous reasons, including college tuition.
For many families, college is a common and significant cost. The College Board reports1 in the 2018-2019 school year, the average college cost for in-state bachelor's degree students at a public four-year college is $10,320. For out-of-state students or students who choose to attend private universities, the costs rise from there.
When you want to ensure a loved one has access to education so their future looks bright, you might want to consider using your life insurance to help pay for college costs. Here's what you should know:
Which Type to Use: Term or Permanent Life Insurance?
More than half of American adults are unaware or don't believe that they are able to tap the cash value of an insurance policy to fund college, MarketWatch reports.2 However, those who are permanent life insurance policyholders may indeed have the option to use life insurance to help pay for college.
It's important to be aware that this option is not available to term life insurance policyholders. Term life insurance covers the policyholder for a set amount of time and does not accrue cash value.
What Is a Permanent Life Insurance Policy?
A permanent life insurance policy is designed to stay in place for your entire life, whereas term life insurance provides short-term coverage for a specified number of years. As you pay premiums toward permanent life insurance, you also grow a tax-deferred cash value, which can come in handy if it needs to be used while you're still alive. You may be able to take out a loan against the cash value balance and would then pay back the loan with interest.
There are a few types of permanent life insurance:
- Whole Life Insurance covers you for as long as you live, granted you pay premiums on time. It can build up cash value, which you can borrow against for costs you have now, like college.
- Universal Life Insurance is a type of whole life insurance from AIG Direct that provides policyholders with the flexibility to increase or decrease the coverage amount. It also builds up cash value that the policyholder can borrow against.
If you want to have the option to access cash value from your life insurance policy while you're still alive, consider getting one of these types of life insurance policies. You might even be able to use yours to help pay for a loved one's college costs. Learn more about the differences between term life insurance and whole life insurance.
How Do You Use Permanent Life Insurance to Help Pay for College?
If your permanent life insurance policy has enough cash value for your needs, you can borrow against this accrued value through a policy loan. Policy loans, in most cases, are income tax-free.
When they're used to help pay for college, these loans do not count against a student's eligibility for financial aid3 or other assistance. A permanent life insurance's cash value can help supplement other financial aid funds a student has or help pay the bulk costs of college.
Be aware that if you pass on before the loan is repaid, the death benefits meant to be paid to your beneficiaries will be decreased. Since college can help to make your dependents' future more prosperous through better job potential, you may be fine with this situation. When you use a cash value loan to help pay for your child or children's future through something like college, the benefits in the here-and-now may make sense.
You may be comparing life insurance for college versus a college savings plan, like a 529 plan. Money in a 529 plan is factored into financial aid calculations. It's always important to weigh current needs with future needs, but having the option to access cash value if needed for costs like college can be comforting and useful.
Peace of Mind for the Future
Life is constantly changing and that includes your financial needs. Life insurance helps you provide for your family in the future, and it can also be used for the here-and-now. A life insurance policy that offers flexibility through built-up cash value may be the right choice for you and your family.
If you want life insurance that includes the option to borrow against the cash value, look into permanent life insurance. Products like universal life insurance enable you to save for whatever your needs are. When your goal is to give your family a secure future, paying for college with the help of life insurance may be an ideal solution. Contact AIG Direct for a life insurance quote today.