Sometimes life insurance is marketed as a college savings vehicle, primarily based on the fact that it is “typically not counted in the formula used to determine financial aid eligibility”. But it’s usually better to avoid it since it is a relative high-cost option, and withdrawals to pay for college can be problematic.
“First, parents will have to pay income tax on the difference amount if they withdraw more money than the premium they paid, as well as a potential 10 percent penalty if they are under age 59 1/2,” says Joyce Garner, an insurance broker with Zimmerman & Ray Associates in Roseville, California.
Lessard says that there are also issues if parents decide to take a loan against their policy, as opposed to a straight withdrawal, as policy loans charge interest and require a payback schedule. There’s also the fact that, if a parent takes a large sum of cash from the policy and still needs the death benefit, the policy may lapse from the lack of cash.
It’s usually better to stick with 529 plans or other savings options that lend themselves to the logistics of making withdrawals over the time a student is attending college.