Trying to figure out how to pay for a child’s college education is a mentally exhausting task for most parents. Few people probably think of their variable, whole, or universal cash value life insurance policy as a way to pay for a college education, but it can be a viable cash source.
Of course, the primary reason to buy any life insurance policy should always be to cover and protect the future requirements, needs, and lifestyle obligations of a family. However, once purchased for this need, there are many additional policy features that could allow you to use a permanent life insurance policy for current living needs.
Potential Features of Cash-Building Permanent Life Insurance. You can amass a significant amount of money without having to pay current taxes on the money. Just how substantial the amount of amassed money will be largely depends on what type of policy you opt to purchase. Additional premiums, for example, would only add to the amount of money that is accumulated.
If you ever need to take advantage of the “borrowing” feature on the policy, you can remove a sum of money and not face current taxation as long as the policy is not subsequently lapsed whether intentionally or unintentionally. After you utilize the borrowing feature, you will be repaying yourself instead of a lending agency. If the policy is sufficiently funded, then there might not be a need to repay the borrowed money.
Things to Keep in Mind about Borrowing from Life Insurance. Of course, since it is essentially your money, you can borrow funds from the cash value of your permanent life insurance policy for basically any reason. However, you should make sure that you pay a sufficient amount of premiums to keep the policy “in force.” Borrowing money could mean that you will need to pay greater premiums to keep the cash value of the policy at the suggested level. As long as you do this, a great portion of your child’s college education can be funded with your life insurance policy; yet, you will still have life insurance.
As mentioned above, you might never need to repay the borrowed money if you have a high cash value and pay the necessary premiums. However, you should always consult with an insurance or tax adviser before relying on this approach to pay for your child’s college education.
The Risk versus Benefit. Remember that nothing in life is without risk. Your policy could lapse because there is not enough cash value in the policy for the insurance company to provide the set life insurance benefit amount. The lapse is generally the result of not sustaining a sufficient cash value and/ or failing to make the necessary premium payments. The last thing you want to do is lose your life insurance. A lapsed policy usually means that you will be faced with paying taxes on any cash value above the amount you paid in premiums. If you feel that your policy is at risk of lapsing, you might try to reduce the face value of your policy (the amount paid upon death) to ensure there is enough money.
With all of the above in mind, a life insurance policy is a very feasible method of paying for college and other expenses. You can always consult with an insurance or tax adviser to ensure that it’s the right route for you and your family.
