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Can life insurance help pay for college?

7/1/2020

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Do you have an old permanent life insurance policy that has accumulated cash value? Having an unused life insurance policy isn’t a bad thing. It’s certainly better than the alternative.
 
However, your needs today may not be the same as they were when you purchased the policy. You may have purchased your life insurance when you were younger. Perhaps you had young children in the home or a spouse who relied on you for financial support. Maybe you were still in the early stages of your career and saving for the future.
 
Today, your situation may be much different. You may be nearing retirement with a sizable nest egg. Maybe you don’t have a mortgage or other debt that would be a burden to your spouse if you passed away. Perhaps your children are grown and no longer financially dependent on you.
 
You may feel like your life insurance policy is no longer necessary. Why not surrender the policy and take the cash value?
 
Just because your old policy is no longer needed for its original purpose, doesn’t mean it isn’t useful. In fact, you can use it to achieve other goals, like providing supplemental income, leaving a legacy for family, and more.
 
One effective purpose for the policy is to use it to support your grandchildren’s education. In fact, life insurance can be a flexible, efficient tool to support your grandchildren as they further their education.
 
Tax-efficiency. As you may know, cash value accumulates inside a permanent life insurance policy on a tax-deferred basis. You don’t pay taxes on the growth as long as the funds stay inside the policy.
 
However, you also may be able to take tax-free distributions from the policy. One way to do this is by taking withdrawals. When you take a withdrawal, your premiums come out before your gains. Premium distributions are tax-free. Withdrawals of gains are taxed as income.
 
Another way to take a tax-free distribution is to take a loan from the policy’s cash value. You don’t pay taxes on the distribution, and you repay the loan over time. If you pass away before repaying the loan, the balance is deducted from your death benefit.
 
Flexibility. You can take a withdrawal from a life insurance policy at any time for any reason, assuming you have enough cash value in the policy to support the death benefit. That differs from other college savings tools, like 529 plans, which require you to use withdrawals for qualified education expenses.
 
That flexibility could help you support your grandchildren in whatever way they need. For instance, maybe they need help with tuition, but maybe they need more help with other expenses, like food or rent. Or perhaps you have a grandchild who is charting his or her own path and skipping the traditional college experience. You can use your policy to help them in whatever way you like.
 
Financial aid. It’s always important to check with financial aid professionals before making gifts. However, generally speaking, life insurance cash value belonging to grandparents does not count as an asset on a financial aid application. That means you can support your grandchild without hurting their chances to earn scholarships, grants and other forms of aid.
 
You don’t need to have an existing policy to make use of this strategy. If you’re in relatively good health and have assets you would like to use to support your family, you may benefit from purchasing a new policy. We can help you evaluate your goals and determine the right strategy.
 
Let’s connect today and discuss how you can best help your grandchildren make their dreams reality. Contact us today at Cornerstone Financial Associates and let’s start the conversation.
 
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency. 20196 - 2020/6/22
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