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Saving for College: Life Insurance or 529?

The pros and cons of two ways to fund a child's education

By

澳洲幸运5官方开奖结果体彩网:Adam Palasciano

Updated March 10, 2025

Fact checked by

Rebecca McClay

One of the more popular ways to save for college is a tax-advantaged 529 plan. However, a permanent life insurance policy is another possibility, as it has a tax-deferred savings component. While a 529 plan is more limited when it comes to how funds can be used, life insurance can be more expensive d🐬ue to having higher fees.

Key Takeaways

A 529 plan offers both tax-deferred and tax-free withdrawals if the money is used for qualified education expenses. However, it can also adversely impact an applicant’s financial aid eligibility.
A permanent life insurance policy has a savings feature, but you might incur significant fees.
Do your research before deciding which college savings vehicle is right for your family.

529 Plans Explained

A 529 plan lets you invest in a variety of possible 澳洲幸运5官方开奖结果体彩网:mutual funds, and whatever you earn will grow tax-deferred. All withdrawals will be 100% tax-free, so long as the funds are used to pay for qualified education expenses. Additionally, many states have 澳洲幸运5官方开奖结果体彩网:tax credits or 澳洲幸运5官方开奖结果体彩网:deductions a༒vailable for those who contribute to their plans.

Note

There are curre𝐆ntly no federal tax credits or deductions for 529 plan contributiꦉons.

Permanent Life Insurance Explained

While a 529 plan may be a more well-known vehicle for college savings, a 澳洲幸运5官方开奖结果体彩网:permanent life insurance policy is still a viable option. When you pay your insurance premiums, only a portion of that contribution goes toward your 澳洲幸运5官方开奖结果体彩网:death benefit. The rest goes into a cash-value account, which you can take out a loan against.

Important

If you default on a 澳洲幸运5官方开奖结果体彩网:life insurance policy loan, then your death benefit will be reduced as a re🦩sult.

There are two types of permanent life insurance: whole and variable. With whole life insurance, the policy issuer credits your account with a guaranteed amount—and potentially more depending on how well your investments perform. Meanwhile, with 澳洲幸运5官方开奖结果体彩网:variable life insurance, the annual performance of your entire account is pegged to the mutual funds you attach to it. This offers a greater level of control over your investments, but your account can lose money if the market falls.

Pros of Using Life Insurance for College

Perhaps the biggest benefit of a life insurance policy as a college sa💫ving vehicle is the flexibility it offers. In most cases, the earnings in your 529 account will be subject to income taxes plus a 10% penalty when withdrawn for anything other than a qualified education expense. Mea𒀰nwhile, you can use the funds you get from your life insurance policy for practically any purpose, and so long as the amount you borrow is no greater than your total premium payments, it won’t be taxable.

Tip

Some 529 plans may allow the 澳洲幸运5官方开奖结果体彩网:beneficiary to withdraw the funds, which may be a more strategic option if a non-qualified withdrawal is required and they’re in a lower 澳洲幸运5官方开奖结果体彩网:tax bracket. Other options for reducing a tax hit include using the plan’s funds to repay up to $10,000 in student loan debt, transferring up to $35,000 into a Roth individual retirement account (IRA) for the beneficiary, or changing the plan's beneficiary to a different family member.

Additionally, a life insurance policy won’t be included in the calculation of your child’s financial aid eligibility. Conversely, up to 5.64% of parental assets (including 529 funds) are factored into an applicant’s Student Aid Index (SAI).

Cons of Using Life Insurance for College

On the other hand, one of the main drawbacks of a life insurance policy is that at least 50% of your first year’s insurance pre🐓miums may go to the insurance representative. Due to this and the many other fees, your policy’s cash value likely won’t exceed the cost of your premiums for at least 10 years. Additionally, most life insurance policies will charge around 2% per year to offset investment and administrative costs.

A 2024 Morningstar report found that a 529 plan sold directly to the consumer in 2023 had an average expense ratio of 0.32%. Even a 529 plan sold by an advisor had an average expense ratio of just 0.82%.

The Bottom Line

As a college saving vehicle, a life insurance policy offers a few unique benefits, including funding usage flexibility and the fact that it doesn’t affect federal student aid eligibility. Despite this, fees and other expenses can really e♔at into your earnings, so a 529 plan is likely the stronger option of the two.

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