Can Life Insurance Help Pay for College? One Tax Attorney Says Yes

With college costs continuing to be a major concern for families, most parents think about 529 plans, savings accounts, and investments when preparing for their children’s education. But one tax attorney highlighted in a recent People article is taking a different approach: using the cash value of permanent life insurance as part of his college-funding strategy.

Nashville tax attorney Brian Boyd purchased a whole life insurance policy when his son was a newborn. According to the article, he contributes approximately $600 per month to the policy, including additional contributions designed to increase its cash value.

Today, the policy reportedly has accumulated more than $100,000, with Boyd projecting that it could be worth nearly $265,000 by the time his son turns 18.

How Can Life Insurance Pay for College?

Certain permanent life insurance policies build cash value over time. Depending on how the policy is structured, the policyowner may be able to access that value through withdrawals or policy loans.

Boyd’s strategy is to borrow against the policy’s accumulated cash value to help pay his son’s undergraduate expenses rather than simply withdrawing all of the money.

This can provide families with another source of funds for expenses such as:

• College tuition and fees
• Housing
• Books and educational expenses
• Graduate school
• A future home purchase
• Other major financial needs

Boyd isn’t relying exclusively on life insurance. His family also uses a 529 college savings plan, traditional savings, and a money-market account. His approach demonstrates how permanent life insurance can potentially complement other savings strategies rather than necessarily replace them.

Why Some Families Consider Permanent Life Insurance

One attraction is flexibility.

A 529 plan is specifically designed for education and offers valuable tax advantages when the money is used for qualified educational expenses. Permanent life insurance, however, isn’t restricted exclusively to education.

Cash value accumulated inside a properly structured policy may potentially be accessed for college, retirement income, emergencies, a home purchase, business opportunities, or other financial needs.

At the same time, the policy provides something a traditional investment or college account does not: a life insurance death benefit.

It’s Important to Understand the Trade-Offs

Using life insurance as a savings or college-funding strategy isn’t appropriate for everyone.

Permanent insurance generally costs considerably more than term insurance, and cash-value growth can take time. Policy loans also accrue interest and can reduce the policy’s cash value and death benefit.

If a policy with outstanding loans is surrendered or lapses, there can also be significant tax consequences.

That’s why these strategies should be designed around someone’s overall financial situation rather than purchasing a policy simply because it can accumulate cash value.

Whole Life vs. Indexed Universal Life

The strategy described in the People article specifically involves a whole life insurance policy with paid-up additions, but whole life isn’t the only type of permanent insurance capable of accumulating cash value.

Indexed Universal Life (IUL) is another form of permanent life insurance that can build cash value.

An IUL’s interest-crediting potential is linked to the performance of a market index, subject to the policy’s caps, participation rates, floors, charges, and other provisions. The policy isn’t directly invested in the stock market.

When properly designed and funded, an IUL can potentially provide:

Life insurance protection today + cash-value accumulation + access to funds later.

That combination is why some families consider permanent life insurance as part of a broader strategy for education, retirement, and long-term financial planning.

The Bigger Lesson: Start Early

Perhaps the most important part of Boyd’s story isn’t the particular financial product he selected.

It’s that he started when his son was a newborn.

Giving money 15, 18, or 20 years to accumulate can make an enormous difference. Whether a family chooses a 529 plan, investments, permanent life insurance, or a combination of strategies, starting early provides more time for compounding to work.

The right solution depends on the family’s income, goals, risk tolerance, insurance needs, and time horizon.

Life insurance doesn’t have to be viewed only as something that pays when someone dies. Certain permanent policies can also become part of a family’s broader financial strategy while they’re living.

Life insurance policy loans and withdrawals reduce available cash value and death benefits and may cause the policy to lapse. Loans generally accrue interest. Tax treatment depends on individual circumstances and policy structure. Indexed universal life insurance does not directly participate in any stock or equity investment. Consult appropriate tax and financial professionals regarding your individual situation.

https://people.com/tax-lawyer-defends-using-life-insurance-to-pay-for-son-s-college-education-exclusive-12076910

Life insurance for college vs. a 529 plan: how do the rules compare?

A 529 plan is built for one job: paying for education. A whole life policy is built to pay a death benefit, with cash value as a side feature. That difference shapes the tax rules.

IRS Publication 970 (for 2025 returns) calls 529s “qualified tuition programs.” It says no tax is due on a distribution unless it is more than the student’s adjusted qualified education expenses. If you take a taxable distribution, you generally also owe a 10% additional tax on the amount included in income, with some exceptions.

Pub. 970 also allows a limited rollover of leftover 529 money into a Roth IRA for the same beneficiary. The account must have been open more than 15 years, and other limits apply.

Sources for the policy loan row are covered in the policy loan section below.

How does the FAFSA treat cash value and 529 plans?

The U.S. Department of Education’s 2025–26 Federal Student Aid Handbook lists “retirement and life insurance plans and ABLE accounts” as excluded assets. It states that the cash value or equity of a whole life insurance policy isn’t reported as an asset.

A 529 is treated differently. The handbook calls 529 plans, Coverdell accounts, and prepaid tuition refund values “qualified education benefits.” For a dependent student, a parent-owned account designated for that student is reported as a parental investment. Accounts for the student’s siblings are not included.

Two cautions from the same handbook. First, an insurance settlement may count as income if it is included in the student’s adjusted gross income. Second, retirement distributions count as income even though the accounts are not assets. Excluded as an asset does not always mean invisible.

These rules cover the FAFSA. If a college asks you to fill out its own aid forms as well, ask that school’s aid office how it treats cash value before you count on the exclusion.

What does a policy loan really cost?

If you use life insurance for college, you can borrow against the cash value instead of surrendering the policy. Guardian (updated March 20, 2025) explains the trade-offs:

• Easy to get. A policy loan doesn’t require a credit check or income verification.
• Flexible repayment. You can repay on your own schedule, in a lump sum, or not at all.
• Interest still applies. The rate is usually lower than a personal or home equity loan, but it is not zero.
• Smaller death benefit. Unpaid loans and interest are subtracted from the death benefit.
• Lapse and tax risk. If the loan grows too large, the insurer can end the policy, and you may owe income tax on the amount borrowed.

Hypothetical example: You borrow $40,000 for tuition and assume a 6% loan rate, compounded yearly, with no payments. After 10 years, the balance is $40,000 x 1.06^10 = $40,000 x 1.791 = about $71,600. If you died then, a $250,000 death benefit would pay about $250,000 – $71,600 = $178,400. The 6% rate is an assumption; ask your carrier for its actual loan rate.

Now compare paying the interest each year. At the same assumed 6%, interest on $40,000 is $40,000 x 0.06 = $2,400 a year, or $200 a month. Paying that keeps the balance at $40,000 instead of letting it grow. Over 10 years, you would pay $2,400 x 10 = $24,000 in interest, but the death benefit would only drop by the $40,000 you borrowed.

What happens to Parent PLUS loans if a parent or student dies?

Federal law handles this one for you. Under 34 CFR 685.212, if a borrower dies, or if the student on whose behalf a parent took out a Direct PLUS loan dies, the Department of Education discharges the obligation of the borrower and any endorser to make further payments.

Proof is required, such as an original, certified, or accurate photocopy of the death certificate. The CFPB adds that relatives can notify the loan servicer, and that federal loans won’t transfer to another person.

So life insurance is not needed to cover a Parent PLUS balance. Where it still matters is the rest of the plan: the tuition still ahead, and the income a family loses if a parent dies mid-degree.

How much life insurance do parents need during the college years?

Saving is only half of the plan for college. The other half is making sure the plan survives if a parent dies before the last tuition bill. A discharge of past federal loans does not pay for future semesters.

Hypothetical example: Your son starts college next fall. You expect to pay $22,000 a year for four years, and you have $30,000 saved in a 529. The gap is ($22,000 x 4) – $30,000 = $58,000. You also co-signed a $20,000 private loan. Your spouse would need help with lost income: say $40,000 a year for 5 years, or $200,000.

Add it up: $58,000 + $20,000 + $200,000 = $278,000. A $250,000 to $300,000 term policy would cover most or all of it. A 10- or 20-year term usually fits, since the need ends when the degree and loans are done. Our how much life insurance do I need guide can help you run your own numbers.

This is a different use of life insurance for college than the cash value strategy above. One protects the plan; the other funds it. The price gap is wide. At age 50, MoneyGeek’s samples show $250,000 of 20-year term at $59 (women) to $77 (men) a month, versus $146 to $186 a month for just $100,000 of whole life. Samples only, not a quote.

Should parents who co-sign private student loans carry life insurance?

Private loans are where the gap is. The CFPB says private lenders are not legally required to cancel private student loans when the borrower dies, and the debt may pass to a cosigner.

A 2021 U.S. Senate press release said federal law releases cosigners when the student dies only for private loans made after November 20, 2018. Older loans follow the contract.

The risk also runs the other way. In 2014, the CFPB found that many private loan contracts let the lender demand the full balance when a cosigner dies, even when payments are current. A student could face a large bill just as they lose a parent.

A term policy sized to the co-signed balance can cover either case. MoneyGeek shows samples of $59 a month for a 50-year-old woman and $77 for a 50-year-old man for $250,000 of 20-year term (updated October 11, 2026). Samples only, not a quote.

Hypothetical example: term plus a 529 vs. whole life

This hypothetical example compares two ways a 40-year-old mother could spend the same $127 a month. It uses MoneyGeek sample rates for a nonsmoker in average health. Samples only, not a quote.

Rate sources: MoneyGeek term rates (updated October 11, 2026) and MoneyGeek whole life rates (updated September 30, 2026).

We do not project investment returns or cash values here, because both depend on the plan and the policy. Option A gives five times the death benefit while the kids are young. Option B gives lifelong coverage and money you can borrow for any purpose. Ask for a signed policy illustration to see the cash value year by year before you choose.

Questions to ask before using life insurance for college

1. How much cash value will the illustration show in the year my child starts school, on the guaranteed basis, not just the projected one?
2. What is the policy loan rate, and is it fixed or variable?
3. How large can the loan grow before the policy is at risk of lapsing?
4. Would a lapse with a loan create a tax bill, and roughly how much?
5. Do I need more death benefit now than this policy provides? Would term fill that gap more cheaply?
6. Have I funded a 529 or retirement accounts first, or am I skipping them?
7. Does each college I’m considering use only the FAFSA, or does it ask about cash value on its own forms?
8. Have I co-signed any private loans, and do I have enough term coverage to pay them off?

A licensed agent can run illustrations side by side. Learn more on our whole life insurance and term vs. whole life insurance pages.