Variable Life Insurance Policies
Certain types of life insurance policies, including variable life, cash value life insurance and whole life insurance, combine life insurance with a tax-deferred investment account, and provide tax-free access to the cash value of the policy. Some insurance companies promote these insurance policies as a college savings vehicle because the value of the policy is sheltered from financial aid need analysis formulas. But these life insurance plans may benefit the salesperson more than they benefit the family.
The advantages of a variable life policy are as follows:
The disadvantages to such policies are as follows:
Some insurance salespeople encourage families to borrow money to help fund the life insurance policy. For example, they may suggest that the family get a second mortgage or a cash-out refinance to get money to invest. It does not make sense to be paying interest on a debt in order to earn a lower rate of return on an insurance policy, even after one considers the impact on taxes and financial aid.
Parents with children who are more than three years old should not consider variable life insurance as a college savings vehicle. Parents with children who are less than three years old will often be better off investing in a section 529 plan or Coverdell Education Savings Account.
The following is an excerpt from page AVG-15 of the 2012-13 Application and Verification Guide, a source of subregulatory guidance from the US Department of Education:
Retirement plans and whole life insurance. The value of retirement plans (401[k] plans, pension funds, annuities, non-education IRAs, Keogh plans, etc.) is not counted as an asset, but distributions do count as income -- they appear in the AGI if taxable and in questions 44 and 92 if untaxed. Similarly, the cash value or equity of a whole life insurance policy isn't reported as an asset, but an insurance settlement does count as income.
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