For many families, helping a child or grandchild pay for college is one of the most meaningful financial goals they’ll ever set. The earlier you begin saving, the more time your money has to grow, but with so many options available, it can be difficult to decide where to start.
Two of the most common tools for education funding are cash value life insurance and 529 college savings plans. Both can help offset rising tuition costs, yet they work very differently. Understanding the strengths and limitations of each can help you decide what fits best with your overall financial strategy.
The Rising Cost of Higher Education
According to CollegeData.com, the average annual cost of college (including tuition, fees, room, board, and supplies) is now approximately $28,840 for public universities and $60,420 for private institutions. Given these numbers, families are looking for ways to start early, save efficiently, and minimize tax exposure along the way.
Option 1: Cash Value Life Insurance
When most people think of life insurance, they focus on its core purpose of providing a death benefit to protect loved ones. However, certain types of permanent (cash value) life insurance can also accumulate value over time that may be accessed while you’re still living.
Potential Advantages
- Provides an income tax-free death benefit that could help pay for education costs if you pass away unexpectedly.
- Cash value grows on a tax-deferred basis.
- Policy loans or withdrawals can be used to pay college expenses, typically tax-free.*
- Funds aren’t limited to qualified education expenses.
- Cash value policies are generally protected from market downturns.
- Life insurance cash value is not counted under FAFSA® when determining federal financial aid eligibility.
Considerations and Drawbacks
- Policies require medical underwriting and may not be available to everyone.
- Fees, mortality charges, and surrender costs can impact early performance.
- It takes time for cash value to accumulate — this is not a short-term strategy.
- Premiums are not tax-deductible, and excessive borrowing could cause the policy to lapse.
- Growth is usually limited compared to market-based investments.
Things to Know
- If a policy is classified as a Modified Endowment Contract (MEC), withdrawals or loans may become taxable and could incur a 10% penalty if taken before age 59½.
- There are no IRS contribution limits, though premiums must meet policy and federal guidelines.
- Loans and withdrawals reduce the death benefit and available cash value.
*Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax.
Option 2: 529 College Savings Plans
A 529 plan is a tax-advantaged account designed specifically for education savings. Funds can be used for qualified expenses from kindergarten through graduate school.
Potential Advantages
- Many states offer an income tax deduction or credit for contributions.
- Investment earnings grow tax-deferred, and withdrawals for qualified expenses are tax-free.
- Large aggregate contribution limits make 529 plans suitable for long-term saving.
- Account owners maintain control of the funds, even after the beneficiary reaches adulthood.
- Starting in 2024–2025, grandparent-owned 529 accounts no longer affect federal financial aid eligibility.
- Unused funds can now be rolled over, up to $35,000 lifetime, into a Roth IRA for the beneficiary — provided the 529 has been open at least 15 years.
Considerations and Drawbacks
- Non-qualified withdrawals are subject to income tax and a 10% penalty on earnings.
- Investment options are limited to the plan’s menu and are subject to market risk.
- Fees and expenses vary by state and plan provider.
- 529 accounts do not include a death benefit.
- Funds are reported as parental assets on FAFSA®, though they typically have minimal impact on aid eligibility.
Choosing What’s Right for You
There’s no universal solution — your choice depends on your goals, timeline, tax situation, and comfort with risk. Some families use both strategies together: a 529 plan for tax-advantaged education savings and a permanent life insurance policy for protection, flexibility, and supplemental funding options. The most important takeaway is to start early. Even small contributions can grow significantly over time through compounding and consistent planning.
Let’s Talk About Your Education Funding Strategy
If you’re considering how to fund education for your children or grandchildren, our team can help you compare your options in the context of your broader retirement and legacy goals. Schedule a no-obligation consultation with a financial professional at Gregory Ricks & Associates to discuss college savings, tax efficiency, and long-term financial planning.
The free consultation provides an overview of products and services offered by Gregory Ricks & Associates. Investment advisory services made available through AE Wealth Management, LLC, a Registered Investment Adviser, and there is no obligation. Gregory Ricks & Associates has a strategic partnership with tax professionals and attorneys who can provide tax and/or legal advice. AE Wealth Management, LLC (AEWM) is not affiliated with the Strategic Partnerships. Any and all other services offered by the Strategic Partners are not offered through or supervised by AE Wealth Management, LLC This article is meant to be general and is not investment or financial advice or a recommendation of any kind. Please consult your financial advisor before making financial decisions. For more detailed information, contact a financial advisor with Gregory Ricks & Associates, Inc. Investment advisory products and services through AE Wealth Management, LLC. (AEWM) Insurance products are offered through the insurance business Gregory Ricks & Associates, Inc. AEWM does not offer insurance products. The insurance products offered by Gregory Ricks & Associates, Inc. are not subject to Investment Adviser requirements. Guarantees and protections provided by insurance products, including annuities, are backed by the financial strength and claims-paying ability of the issuing insurance carrier. 3421959 – 10/25