The Facts of Life Insurance: How to use it for College Savings

The Facts of Life Insurance: How to use it for College Savings

May 02, 2024

A 529 plan is a popular tax-advantaged savings account to help your child pay for college tuition. However, 529 plans have contribution limits, and upon reaching the maximum limit, any more money will trigger the gift tax. An alternative method to consider is permanent life insurance. With permanent life insurance, you have the option to withdraw funds or take a loan out against your policy’s cash value. And, unlike a 529 plan that only goes toward college tuition, permanent life insurance funds can go toward any educational expense.

How does permanent life insurance work?

Permanent life insurance is a tax-deferred savings structure where the policy’s death benefit has the potential to accumulate cash value on a tax-deferred basis. Part of the contributed money goes toward the death benefit, and a separate portion goes into a cash-value account. Investors typically prefer whole life insurance as their permanent life insurance option. Your account gets credited by the issuer with a guaranteed amount, and if the market is performing well, you could earn more in returns. After the first few years, depending on the market, it is possible to see returns between 3 and 6 percent. [i]

What are the advantages of permanent life insurance when saving for college?

  • Money grows in the cash value account tax-deferred.
  • You can access that money to assist with educational expenses by withdrawing from or borrowing against the cash value account.
  • If your child decides against attending college, you be penalized for using the money for something other than education.
  • It is not included in financial aid calculations. [ii]

Are there any disadvantages?

  • Potential costly initial and recurring fees.
  • A cost of insurance charge (monthly charges for administration, mortality, and other expenses of the life insurance company).
  • It might take up to ten or more years for the cash value to exceed the amount you paid in premiums. [iii]
  • Should you borrow from an insurance policy, you will pay interest and it may decrease the death benefit if the loan isn’t paid off. [iv]

To learn if permanent life insurance can work for you and your financial goals, consider consulting a financial professional who has experience with education savings plans.


Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such  as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by LPL Marketing Solutions

[i]Saving for College: Life Insurance or 529? (

[ii]Saving for College: Life Insurance or 529? (

[iii]Life Insurance or 529 for College Savings? | Bankrate

[iv]How Can I Borrow Money From My Life Insurance Policy? (

LPL Tracking # 1-05362987