Supplement College Savings With Whole Life Insurance

Father and daughter (18 months) walking up steps to house

Whole life insurance isn’t typically top of mind when it comes to saving for college, but it can be used as part of a well-rounded funding plan, which includes a 529 plan. The value of a policy can grow over time and ultimately provides access to money with several advantages as a college savings fund.

A 529 plan can be a great way to save for a child’s education, offering a number of financial benefits when used for qualifying expenses—including generous contribution limits, favorable state tax treatment for state residents, tax-deferral of earnings, and tax-free distribution. It also offers a number of investment options within the plan so you can take advantage of professional money management for potential growth. But despite these benefits, there are limitations. A 529 plan is subject to investment and market risks, so a downturn in the market can leave you with less funds than you need. A 529 plan investor should always consider the program’s investment objectives, risks, charges, and expenses before investing. The program disclosure statement, available through your financial professional, contains more information and should be read carefully before investing. Before investing, investors should consider whether their home states offer 529 plans that provide state tax and other benefits only available to state taxpayers investing in such plans.1, 2

Compared to other savings vehicles, such as 529 plans, a whole life insurance policy is more flexible.3 For one, a 529 plan can only be used for qualifying educational expenses whereas the cash value of a whole life insurance policy is not limited to specific types of expenses, giving you more flexibility over how you can use your money. It’s also typically excluded from college financial aid formulas, so it won’t detract from any aid your child could receive.

While the most obvious approach would be to use the cash value of your life insurance policy toward your child’s educational expenses, there are multiple ways to use whole life to save for college in combination with more traditional college savings options.

Use your cash value.

Of course, the primary purpose of life insurance is to provide a benefit to help your family cover expenses, including college costs, in the event of an untimely death. A whole life policy provides both a guaranteed life insurance benefit and a savings feature. This savings feature comes with the cash value of the policy, which grows tax-deferred over time. As a whole life policy owner, you’re also eligible to receive dividends. Dividends can be received as cash or can be used to purchase additional insurance, which can deliver even more dividends over time.

To pay educational expenses, you can withdraw some of your cash value.1 Accessing the cash value will reduce the available cash surrender value and total life insurance benefit of the policy. The money is generally tax free—up to the amount of premiums you’ve already paid. Beyond that amount, it’s taxable but this may not matter since educational expenses, except for room and board, are tax deductible.2

Using your cash value doesn’t have the same restrictions and limitations as 529 plans, so it can be used as a complement to this savings vehicle. Unlike funds in a 529 plan, this money can be used for anything you want. You’re not limited by the IRS’s definition of qualified educational expenses and using this money will not typically reduce the amount of financial aid for which your child is eligible.

Take a loan against the value of the policy4, 5

Another approach for those who wish to use whole life as a college savings vehicle is taking out a loan against the value of the policy. The advantage here is that the money you receive is generally tax free and there’s no loan application process. While other loans require you to prove your eligibility, a loan against your life insurance policy uses the value you’ve already accumulated as collateral. Like other loans, a loan against your cash value will accumulate interest, but borrowers are not required to make payments on the loan. (Still, paying back the loan should be part of your plan as a loan can reduce the life insurance benefit attached to the policy.) There may also be tax consequences if your policy lapses with an outstanding loan.

Use your child’s policy value.

Paying for expenses related to your child’s education can also be done through his or her own life insurance policy. As a parent, you can insure your child at a young age and access the policy’s cash value later—similar to how you would access the cash value of your own policy.1 An advantage is that the younger and healthier the insured is, the less life insurance costs; so children are relatively inexpensive to insure. If you purchase a policy when your child is very young, it can accumulate value for when they are ready to go to college to offset some of the expenses. In addition, you can lock in protection for the rest of your child’s life.

Want to learn more about which college savings method is right for your family? A financial professional can walk you through the most effective approaches including the possibility of complementing your college funding plan with life insurance.

Connect with a financial professional

Customize a strategy that works best for you.

1Neither New York Life Insurance Company nor its affiliates and agents provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions. In Oregon, the policy form number for New York Life Whole Life is ICC18217-50P (4/18). 

2New York Life Insurance Company (NY, NY).  Securities are offered through NYLIFE Securities LLC (Member FINRA SIPC), a licensed insurance agency and New York Life company.

3A whole life policy involves insurance fees and charges, while a 529 plan does not; however, a 529 plan involves investment fees and charges. A whole life policy involves the risk of lapse, in which case the insured would lose the insurance benefit. Guarantees are based on the claims-paying ability of the issuer.

4Accessing the cash value will reduce the available cash surrender value and total life insurance benefit of the policy

5There may be adverse tax implications for a policy classified as a modified endowment contract (MEC) or if the amount of your loans and/or partial surrenders exceeds the cost basis of the policy. In addition, certain partial surrenders from a policy that is not classified as an MEC and that are made within the first 15 years after it is issued may be fully or partially taxable. Distributions, including loans, from an MEC are taxable to the extent of the gain in the policy and may also be subject to 10% additional tax if the owner is under age 59½.