Life Insurance for College Planning: Using Policies to Support Higher Education

College costs are rising faster than ever, and for families thinking long-term, finding creative ways to save is essential. While 529 plans and savings accounts are the usual go-tos, there’s another tool that often gets overlooked: permanent life insurance. Not only does it provide financial protection for your family, but it can also serve as a backup or supplement to your education savings strategy. If you’re planning for your child’s college future, here’s how life insurance can support those goals—while also offering peace of mind.

Why Consider Life Insurance for College Planning?

At its core, life insurance is designed to provide financial protection in case something happens to you. But with permanent life insurance, such as whole or universal life, the policy includes a cash value component that grows over time.

This cash value can:

Be used while you’re still alive
Be accessed for large expenses like tuition
Provide a flexible, tax-advantaged source of funds

It’s a strategy that combines financial protection with potential growth—perfect for families thinking ahead to college costs.

Term vs. Permanent Life Insurance

Let’s quickly compare the two types of life insurance to understand which works for college planning:

Term Life Insurance

Covers you for a specific number of years (e.g., 20 or 30)
Has no cash value
Much more affordable
Best for pure protection (e.g., covering income during your working years)

Permanent Life Insurance (Whole or Universal)

Lasts your entire life, as long as premiums are paid
Builds cash value over time
Can be used while you’re alive, including for education expenses

Bottom line: For college planning, it’s the cash value in permanent policies that offers added flexibility.

How Cash Value Can Be Used for College

Over time, a permanent policy accumulates cash value, which can be accessed through:

Policy loans: You borrow from the cash value and pay it back (often with low or no interest).
Withdrawals: You take out some of the cash value permanently (may reduce the death benefit).
Surrendering the policy: You cancel the policy and take the full cash value (not ideal if you still need coverage).

Many families use policy loans as a way to help fund college tuition or related costs. These loans don’t require a credit check, and they don’t count as income on FAFSA, which can help preserve financial aid eligibility.

Advantages of Using Life Insurance for College Planning

1. Dual Purpose Protection

Even if you never use the cash value for college, your policy still provides life insurance coverage. This means your child is protected no matter what happens to you.

2. Tax Benefits

The cash value grows tax-deferred, and loans taken against it are usually tax-free—as long as the policy stays in force.

3. No Usage Restrictions

Unlike 529 plans, there are no penalties for using the funds on non-college expenses. If your child chooses not to go to college, you can use the money for anything else.

4. Doesn’t Impact FAFSA (in most cases)

Cash value inside a life insurance policy does not count toward the Expected Family Contribution (EFC) on federal financial aid applications. This could make a big difference when applying for grants or subsidized loans.

5. Financial Flexibility

Because there are no specific rules about how and when to use the money, life insurance offers more flexibility than traditional college savings plans.

Considerations and Drawbacks

While life insurance can be a helpful piece of your college funding plan, it’s not a substitute for saving in more traditional ways—and it’s not right for everyone.

Here are a few things to consider:

1. Higher Premiums

Permanent life insurance is significantly more expensive than term insurance. Make sure the premiums fit comfortably within your budget.

2. Slow Cash Value Growth (Early On)

It takes time to build up a meaningful cash value—often several years. Life insurance should be viewed as a long-term strategy, not a short-term solution.

3. Policy Loans Must Be Repaid

If you take out a loan and don’t repay it, it will reduce your death benefit—and potentially trigger tax consequences if the policy lapses.

4. Complexity

These policies are more complicated than term life. You’ll need to work with a trusted advisor to make sure you understand fees, projections, and loan terms.

Comparing to 529 Plans

529 college savings plans are popular for a reason—they offer tax advantages and are specifically designed for education. But they also come with restrictions.

Feature	529 Plan	Permanent Life Insurance
Tax-free growth	✅	✅ (cash value only)
Tax-free withdrawals	✅ (for qualified expenses)	✅ (loans, with conditions)
Penalties for non-education use	✅ (10%)	❌
Impact on FAFSA	✅ (considered an asset)	❌ (cash value not counted)
Flexibility of use	❌	✅
Builds legacy/coverage	❌	✅

Tip: You don’t have to choose one or the other. Many families use both to diversify their college funding plan.

Who Should Consider This Strategy?

Using life insurance for college planning may be a good fit if you:

Want to protect your child’s financial future regardless of what happens to you
Have a higher income and are already maxing out traditional savings options
Want flexibility in how the money can be used
Prefer a strategy that also includes long-term financial protection

Final Thoughts

Life insurance may not be the first thing that comes to mind when planning for college—but it can be a valuable part of your strategy. With permanent coverage, you get both financial protection and a savings component that can help cover big-ticket expenses like tuition. It’s not a replacement for a 529 plan, but it’s a smart supplement for families who want more flexibility, tax advantages, and peace of mind. Start early, work with a knowledgeable advisor, and explore how a life insurance policy can help you invest in your child’s education and future.