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In 2023, the average cost of college per year is $26,027 for in-state public school tuition to $55,840 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 $36,436 per year per child including books, supplies, and daily living expenses2 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 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.

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 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.9

What if I haven't saved enough?

If you are considering using permanent life insurance to help pay for future college costs, you should consider getting the policy while your children are young to build up a meaningful amount of cash value. Of course, it's generally best to start planning early for your children's future college expenses, but not all young parents are in a position to do so. However, you can still use life insurance to help protect your family's financial future.

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. If you don't have a financial professional to discuss insurance with, Guardian can help you find a nearby financial professional who will listen to your needs and help guide you to a solution.

Frequently asked question about saving for college

Is life insurance an efficient way to save for college?

A permanent life insurance policy can be beneficial to help save for college or to offset future education expenses, depending on the size of the policy and how early it is taken out. Whole life insurance provides guaranteed cash value returns, may not impact financial aid as long as you borrow against your account instead of withdrawing or canceling your policy, and the cash can be used for things besides college.10

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This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.

1 https://educationdata.org/average-cost-of-college

2 https://educationdata.org/average-cost-of-college

3 Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company's board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.

4 Some whole life polices do not have cash values in the first two years of the policy and don't pay a dividend until the policy's third year. Talk to your financial professional and refer to your individual whole life policy illustration for more Information.

5 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.

6 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy's death benefit and cash values.

7 Dividends are not guaranteed. They are declared annually by Guardian's Board of Directors.

8 Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.

9 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

10 https://www.investopedia.com/articles/personal-finance/102915/life-insurance-vs-529.asp