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First, the bad news: Tuition prices are soaring with no signs of slowing, and more students are graduating with hefty student loan debt. In fact, the average college student currently carries $35,000 in debt by graduation.

The good news? There are lots of ways for parents to save. A savings vehicle you may not have heard of is a life insurance policy that builds cash value. When it comes to education savings, these policies have a few unique advantages.

Did You Know?

College costs are outpacing inflation, jumping 3.6% last year.

Life Insurance and Your College Savings Plan A life insurance policy that builds cash value is a guaranteed source of funds should a parent die prematurely. A life insurance policy that builds cash value can help supplement traditional college savings vehicles such as Coverdell Education Savings Accounts, Section 529 state tuition programs, etc. Plus, its cash value is not considered when a student applies for financial aid. The funds in a 529 plan, Read more...▼

on the other hand, can subtract up to 5.6 cents in aid for every dollar saved, according to the Department of Education.

How It Works Premium payments are divided three ways:

  1. Covering policy costs and expenses
  2. Funding the death benefit
  3. Funding the policy’s cash value

If you take out a life insurance policy that builds cash value when your child is young, you’ll have built up funds that you can borrow against to cover tuition expenses by the time he or she is ready for college. If your child chooses another path, you can steer those savings elsewhere (penalty free), perhaps to help him or her start a business. This savings method also has potential tax advantages that your Allstate Personal Financial Representative can help you understand.

If you’re purchasing a policy specifically to save for a child’s future, it should supplement, not replace, your existing life insurance, since withdrawing from or taking a loan against a policy’s cash value will reduce its death benefit. Also, life insurance that builds cash value should be just one component of a comprehensive college savings plan.

Tip
Need a primer on the different types of permanent life insurance policies? Visit this page.