How to Use Whole Life Insurance for College Savings

Summary: Whole life insurance offers a flexible alternative to traditional college savings plans like 529s, providing potential funds for education and lifelong financial protection. Its cash value growth and accessibility for various needs, beyond just college expenses, make it a valuable tool for families seeking financial security and adaptable savings strategies.

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The path to college savings doesn't have to be a one-way street. According to the Education Data Initiative, only 35% of families used a college savings fund, such as a 529 plan, to help pay for college in 2024.⁽¹⁾

The life insurance savings alternative

While 529 plans are commonly known for education savings, they can backfire if your grandchild earns a scholarship or takes a non-traditional path, resulting in penalties for non-educational uses. In most circumstances, 529 plan funds may only be used for qualified educational expenses without incurring taxes or penalties. When planning for a child's future education, families should carefully consider all available college savings options, weighing the flexibility of each against their specific financial goals and circumstances

Whole life insurance offers flexible alternative for college savings, gaining recognition with parents and grandparents who want to leave a lasting legacy. As you refine your financial plan in the second half of life, it's worth looking at whole life insurance for college savings, which offers versatility and additional benefits.

Whole life insurance saving options for college

As a parent or grandparent, whole life insurance offers a powerful tool for funding your loved ones' education while providing additional benefits. Unlike 529 plans, whole life insurance builds cash value over time that can be used for college expenses while simultaneously offering permanent life insurance protection. However, if funds are taken out of the whole life policy, this may reduce the death benefit that would be given to your beneficiaries after you pass.

Many don't realize that whole life insurance can be a versatile investment vehicle within your broader financial strategy. You can use the accumulated cash value not only for college expenses but also to potentially boost your supplemental retirement income outside traditional vehicles. For those who consider themselves diligent investors, this approach provides tax-deferred growth potential while maintaining the flexibility to redirect those funds toward various financial goals as your needs evolve.

Using life insurance cash value for college savings

Whole life insurance can assist with education expenses by offering cash-value loans* or withdrawals. As the policyholder, you maintain control of the policy while potentially helping fund a child or grandchild's education.

You have two flexible ways to use this money for college:

When college expenses arise, you can request cash from the insurance company. Life insurance loans typically involve minimal paperwork compared to traditional loans. Once approved, the insurance company issues a check that can be used for tuition, housing, books, or any other college-related expenses.

Creating a legacy that lasts and supports the next generation

If you're between the ages of 45 and 85, starting a whole life insurance policy now creates a powerful financial tool for multiple purposes. While the primary purpose is life insurance protection, the cash value component can be directed toward savings for college, a joyous achievement that shouldn't also become a financial burden.

The benefits of using life insurance for savings include:

You're uniquely positioned to provide this valuable gift as a parent or grandparent. Rather than toys or clothes that are quickly outgrown or forgotten, a whole life insurance policy represents your commitment to the development and success of those you love most.

Consult with a professional tax and/or legal advisor before taking any action that may have tax or legal consequences.

Frequently asked questions (FAQs)

What happens if my child gets a full scholarship? Can I still use the whole life insurance cash value without penalties?

Yes. Unlike 529 plans that may incur penalties for non-educational withdrawals, the cash value in a whole life insurance policy can be used for any purpose. If your child receives a full scholarship, you can still access the money for other expenses like graduate school, a first car, or a down payment on their first home.

How does using whole life insurance for college savings affect financial aid eligibility?

Colleges look at your family's income and assets when applying for financial aid to determine how much you can contribute to education costs. The cash value in your life insurance policy is typically not counted as an asset on the FAFSA (Free Application for Federal Student Aid), which most colleges use to determine financial aid eligibility. This means the money you've built up in your policy won't reduce the federal financial aid your child might receive.

As someone in my 70s, is it too late for me to use whole life insurance to help with my grandchild's college expenses?

While starting earlier provides more time for cash value to accumulate, a whole life policy purchased in your 70s can still be an effective college funding tool. The policy begins building cash value immediately, which you can access through loans or withdrawals when your grandchild reaches college age. One significant advantage is that your premium rate is locked in at purchase and remains unchanged for the policy's life. The younger you are when you purchase, the lower your rate. Even so, many grandparents in their 60s, 70s, and even 80s use whole life insurance as part of their legacy planning, appreciating the flexibility to support education expenses while maintaining control of their assets throughout retirement.

Sources: (1) Education Data Initiative, College Savings Statistics, January 2025 
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