Most people think of life insurance as a way to protect their families from an unexpected loss of income, as a way to help the survivors go on without serious disruptions in their standard of living. It’s the reason why two out of three policyholders bought coverage.1
One often–overlooked consequence of losing an income earner is the possibility that dependent children may not be able to afford a college education.
If you didn’t live to see your children off to school, would your insurance coverage be adequate to cover their tuition and related costs? And what if you do live to see them off to school? Would you also be able to afford their tuition and related costs? Believe it or not, life insurance can be useful in either situation.
A Policy Education
When you own a permanent life insurance policy, a portion of your premiums has the potential to accumulate cash value that you can access during your lifetime, usually on a tax–free basis. For example, when your student begins college, you may be able to withdraw the principal of any accumulated cash value without having to pay taxes or causing the policy to lapse.
Once all the principal has been withdrawn, you may be able to borrow any additional cash value that the policy has accumulated. Withdrawals and loans from a life insurance policy will reduce the policy’s value and death benefit. But as your children get older, your family circumstances may no longer call for a large death benefit.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.
As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered, it may be subject to surrender charges and income tax implications. Before you take any specific action, be sure to consult with your tax professional.
Life insurance is usually thought of in terms of tragic outcomes. But if life goes as planned, you may still be able to use it to send your kids to college.
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