Tax Implications of Using Life Insurance Cash Value for College Expenses

When considering the use of life insurance as a college savings vehicle, many people think only of the death benefit proceeds, and in turn, they have the belief that someone has to die in order to “benefit” from the plan.

But the reality is that there are numerous ways to use a life insurance policy for higher education costs that will not only allow for payment of such expenses, but that can also be beneficial from a tax standpoint.


Why Consider Life Insurance for College Savings

Many people who are saving for a child or grandchild’s future college costs can benefit from the use of a cash value life insurance policy. While the death benefit on a policy is certainly there as a safety net, a permanent life insurance policy can also offer the added benefit of cash value that can be accessed in a number of different ways. And, depending on the timing and the amount of cash that is needed, the policy’s death benefit can still be available as an additional funding mechanism “just in case.”

In addition, once the student’s college expenses have been paid, a life insurance policy may then be repositioned for other potential needs, such as paying off high-interest debt and / or supplementing retirement income with the remaining cash.


Added Life Insurance Tax Advantages

On top of the savings element that cash value life insurance can provide, there are also a number of ways that using a life insurance policy can provide tax related benefits, too. First, the funds that are in a policy’s cash value component are allowed to grow on a tax-deferred basis.

This means that there is no tax due each year on the gain (provided that the funds remain in the policy) – which can allow for added compounding. That’s because the money in the account earns interest – including interest on the funds that would otherwise have been paid out in tax.

When the funds are needed in the future for college expenses (or for any other need), there are ways to access the policy’s cash value through a tax-free loans and / or withdrawals. This can allow for a larger amount of money to be put towards education related needs, as compared to withdrawals from savings plans that are taxable.

And, the longer a policy owner can postpone the taxes that are due, the greater the gain can be. So, while cash value life insurance can be beneficial for college savings at nearly any stage, the earlier clients get started, the more time they will have to build up a substantial amount of tax-deferred funds.

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If by chance the unanticipated does occur and the policy’s death benefit is paid out, these funds are received free of income taxation by the beneficiary – allowing them access to the full amount of the proceeds for their needs.


The Self-Completing Advantages of Life Insurance

Studies have indicated that many families lack the protection that life insurance coverage can provide. In fact, according to LIMRA’s 2015 Insurance Borometer Study, roughly four in ten households have no life insurance protection at all. This could leave survivors in a substantial financial bind – even without college expense considerations.

With that in mind, life insurance is oftentimes considered to be a “self-completing” plan when it comes to college savings strategies, as the death benefit proceeds can be used to ensure that funds will be available, even in the event of the unexpected.

In fact, because no one can predict the future, planning ahead for any type of expense can be filled with uncertainty. Given that, life insurance very well could be the only financial vehicle that can help to ensure the completion of a college funding plan.


Offering College Planning Strategies for Clients Can Cover Multiple Bases

By offering life insurance as a savings mechanism for college planning, you can provide the opportunity to ensure financial protection for your clients, regardless of what the future holds for them.

If you want to join thousands of other insurance professionals who are using these strategies right now to generate an additional $5,000 or more in monthly commissions – without any additional prospecting – while at the same time providing their clients a way to ensure that college expenses are covered, give us a call now, toll-free, at 1-800-643-6143.

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Brian J. Kay, Executive Director, Leads4Insurance
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