Is the Life Insurance Premium for College Savings a Tax Deductible Expense?

For many people who are helping a child, a grandchild, or other loved one to save for their college expenses, using a 529 college savings plan may not be enough. For instance, there are a number of potential drawbacks to using this type of educational funding plan, such as:

  • Withdrawals must be used for education (or education-related) expenses
  • Funding of more than $14,000 (in 2017) from one donor / depositor may need to be claimed on a tax return as a taxable gift
  • If the child ends up not going to college, withdrawals from the 529 plan account will not have tax-advantaged treatment

For these, as well as possibly other reasons, individuals have found that permanent life insurance can provide an ideal way to help a child save for future college costs. Many of these benefits are tax related.


The Many Favorable Tax Aspects of Using Life Insurance as a College Funding Source

Regardless of what it is ultimately used for, there are a number of tax related advantages when using life insurance as a financial tool. This of course starts with the fact that the death benefit proceeds that are received by the beneficiary (or the beneficiaries) are free of income taxation – meaning that 100% of the amount is able to be utilized for various needs, such as debt payoff, payment of ongoing living expenses, and / or a long list of other potential items.

But the favorable tax advantages with life insurance don’t stop there.

While a policy holder is not able to deduct the amount of premium that is paid into an individual life insurance policy that is used for college funding, the money that is inside of a permanent policy’s cash value is allowed to grow on a tax-deferred basis. This means that there is no tax due on this gain until the time of withdrawal.

In addition, depending on the actual strategy that is used for college funding, it may not even be necessary to pay tax then.

As an example, the funds inside of the insurance policy’s cash value can actually be either withdrawn or borrowed for any reason. And, if the money that is used to pay for a child’s college costs is borrowed from the policy, this can be set up as a tax-free loan.

In addition, it is not required that this borrowed money from the insurance policy be paid back.

In this case, interest will accrue on the loan – and, should the insured pass away, any amount of unpaid loan balance will be charged against the amount of the death benefit that is paid to the policy’s beneficiary. (It is also important to note that if the policy should lapse, the amount of unpaid loan proceeds could be considered as taxable income).

With that in mind, knowing how to properly structure a permanent life insurance policy to best suit the needs of your specific clients can provide them with options for funding future college costs, as well as offer them an array of various tax advantages.


How to Show Your Clients Tax Advantaged College Funding Strategies – and Get Paid Well for Doing So!

If you would like to help your clients with their college funding plans – while at the same time earning an ample, additional commission income – we can help. Join thousands of other insurance professionals who are already in the business of assisting their clients with assuring that money will be available for their future college funding needs.

Contact us today, toll-free, at 1-800-643-6143 to get started now!

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Brian J. Kay, Executive Director, Leads4Insurance
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