Using life insurance to help pay for college | Guardian

Key Takeaways:

• Unlike term insurance, whole and universal life insurance include a cash value component that grows tax-deferred and can be accessed via tax-free loans for tuition or living expenses.

• The cash value from permanent life insurance is typically not counted as an asset on the FAFSA, meaning it won’t reduce your child’s eligibility for federal financial aid like a 529 plan might.

• If your child decides not to attend college or receives a scholarship, the accumulated funds can be used for any other purpose, such as retirement or a home down payment, without the penalties often found in dedicated education accounts.

• Because it takes years to build significant cash value and premiums are lower for younger applicants, the strategy is most effective when started while children are very young.

• Life insurance serves as a financial safety net, ensuring that even if a parent passes away, the death benefit can cover the full cost of the child's education.

In 2026, the average cost of college per year is $11,950 for four-year in-state public school tuition, $31,880 for four-year out-of-state public school tuition, and $45,000 for private colleges.¹ Online schools offer some cost savings but are still more than most families can afford out of pocket. An average family can expect college education to cost $30,990 for public in-state, $50,920 for public out-of-state, and $65,470 for private per year per child including books, supplies, and daily living expenses.² So, if you’d like to assist your child in keeping their student loan debt manageable, it's important to start saving as early as possible to build up as much as you can.

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It's possible to grow college savings using traditional savings accounts, but it's good to consider having other assets or college savings vehicles, such as a 529 plan, that can be tapped for funds if needed. What kinds of other assets? The cash value of a permanent life insurance policy is one possibility. Whole life insurance can complement traditional college savings plans like 529s, providing flexibility over when and how you use your money.

What is permanent life insurance?

Permanent life insurance, such as a whole life or universal life policy, provides a death benefit and can build cash value.^3,4 Part of each premium payment for these types of life insurance policies goes towards the life insurance, and another portion goes to build cash value with tax efficiency.⁵ This cash value component is held in a cash value account, which accumulates as you pay premiums and can be accessed in various ways. The earlier you take out a whole life policy, typically the more affordable the premium, and that premium never changes.⁶ The longer you have the policy, the more cash value it can build.

Whole life insurance is usually the most conservative type of permanent insurance because it provides guaranteed cash value growth over time. That means you know your policy will at least provide a known minimum amount of growth. A whole life insurance policy from a mutual company (like Guardian) can also pay dividends.⁷ The cash value is tax-deferred, which can help the policyholder build cash value faster.

A Universal life policy is another form of permanent life insurance that gives policyholders more payment flexibility than a whole life policy.⁸ Universal life insurance allows premiums to vary within a certain range to help account for variations in income. The cash value may also provide higher or lower returns, depending on how it's allocated (and if the policy performs poorly, it may affect the death benefit or the policy could lapse). It takes a while for the cash value to build, but it may eventually grow to a sizable sum. By the time your child starts college, you can borrow against it to help pay tuition and other expenses9 Life Insurance loans allow you to access funds from your policy’s cash value account with minimal paperwork and without the usual eligibility requirements of personal loans. Withdrawals are also generally tax-free.⁹

If you borrow or withdraw from your policy’s cash value, be aware that policy lapses with an outstanding loan can have tax consequences and may impact your policy’s benefits. The money you access from your policy’s cash value can be used not only for college, but also for other expenses such as retirement, a first home, or other unexpected expenses.

What if I haven't saved enough?

If you are considering using permanent life insurance to help pay for future college costs, getting the policy while your children are young can give the cash value more time to grow. Building this into a broader education and long-term financial strategy can make future tuition bills more manageable, even if you were not able to start saving right away. One of the most important steps you can consider is having a term life insurance policy that will help protect your family if something were to happen to you. Also, consider making sure that any policies include enough coverage for your children's college tuition if you are not around to help pay for it.

Term life insurance is typically less expensive than permanent insurance, so you may be able to take out a larger policy with a death benefit that will help cover major expenses, like tuition, if you pass away. Life insurance companies will work with you and your specific situation to ensure you have coverage that you can afford, but consider talking with your financial professional first, to get a sense of the tax and legal implications of using life insurance for college savings. If you don't have a financial professional to discuss insurance with, Guardian can help you find a nearby financial advisor who will listen to your needs and help guide you to a solution.

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