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Paying for College

Life Insurance Not a Great Option to Save for College

You’ve heard the pitch. With a cash-value life insurance policy, you can save for college and improve your chances for financial aid while covering your family in the event of your death. Some policies let you choose among an array of investments, the better to supercharge your savings. Others keep your money in fixed-income investments that protect against inflation. In all cases, earnings grow tax-deferred. You can withdraw up to the amount you paid in premiums tax-free, or take out a policy loan.

As tempting as the strategy may sound, don’t fall for it. “The problem with life insurance policies is that the sales charges are high, and the return on investment is low,” says Mark Kantrowitz, of It may take you as long as ten years to contribute enough to overcome the expenses and another ten to build enough cash to make a dent in the college bills. If you withdraw money within the first seven to ten years, you could also be subject to a surrender charge. With variable policies, if the investments do poorly, you could end up with less than you put in and a lower death benefit than you need.

As for the idea that stashing money in a life insurance policy improves your chances for financial aid, that’s only true to a point. The federal financial-aid formula ignores the cash value in life insurance policies in calculating the assets it expects families to contribute to college—but income, not assets, is “the key driver” in the calculation, says Kantrowitz.

Worse yet, withdrawals from the policy are treated by the federal formula as income to the beneficiary and assessed accordingly, accomplishing the exact opposite of what you intended. So who benefits from these deals? The salesperson who earns a commission on them, says Kantrowitz. “I just don’t see any scenario in which this is a good deal.”