If you own a cash value life insurance policy—universal, whole, or variable—you may be sitting on a potential gold mine for funding your children’s college education.  Why?

When you consider buying life insurance, the main reason must always be to protect your family’s lifestyle and cover their future needs.  In other words, life insurance must always be purchased because there is a need.  But there are additional features that may let you use this same life insurance for living needs, too.  Permanent life insurance—life insurance that builds cash value—can help you accomplish many goals:

·        It lets you accumulate significant cash without current taxation.[1]

·        Depending on the type of policy, you can pay additional premiums and further enhance this cash accumulation feature and the associated tax benefits.

·        There is a “borrowing” feature that lets you take out potentially large amounts of money without paying taxes.  When you pay the money back, you are repaying yourself rather than a bank.[2]

·        You may never have to pay the money you borrow back, if the policy is adequately funded.[3]

You can borrow from your life insurance policy cash value for just about any reason.  Of course, you need to pay enough in premiums to keep the life insurance policy “in force” and borrowing may mean paying more premiums to keep your policy cash value at a suggested level.  But, as long as you manage the money you borrow and keep making any necessary premium payments to the insurance company, you may be able to borrow much of the cost of your children’s college education and still keep your insurance.

Even better, if you have a sufficiently high cash value, and you keep making any necessary premium payments, you may never need to pay back the money you borrowed.  This is a fairly sophisticated approach though, so always consult with your insurance and tax advisors before you take any policy loans.

Of course, nothing is a free ride.  If you do not maintain a sufficient cash value and/or pay enough in premiums, your policy could “lapse”—it could fall apart because there is not enough cash value or cash inflow to provide the agreed upon life insurance benefit.  In this case, you might be able to reduce the policy value (face amount paid at your death) so there is enough money.  If you don’t take the right steps to keep your life insurance policy “in force”—paying premiums, paying back loans and/or maintaining enough cash value to cover the policy costs—you could lose your life insurance.  If this happens, you may have a very nasty tax problem.  Generally, if you allow an insurance policy to “lapse,” you will owe tax on any cash value above the actual amount you paid in premiums, and any unpaid loans get added to this cash value.

So, if you’re looking for additional cash to pay for that college education (or many other expenses), you may need to look no farther than your own life insurance policy.

[1] Check with your tax advisor to ensure your policy will not be subject to current taxation on cash value growth.

[2] Please check with your insurance and tax advisor to make sure your loan meets certain guidelines.  Loan interest rates may apply.

[3] Check with your insurance advisor to ensure your policy is properly structured.  If your policy lapses with an outstanding loan, loan proceeds may be subject to taxation.