Will a life insurance policy affect FAFSA at all?

UPDATED: Feb 26, 2014

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UPDATED: Feb 26, 2014Fact Checked

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Asked February 26, 2014

1 Answer

A Free Application for Federal Student Aid, or FAFSA, is the name of an application form used for government loans related to education. When you fill out the form, you are required to list your financial holdings such as savings accounts, checking accounts or other investment and savings vehicles, but not values held in life insurance policies.

Even though some types of life insurance include tax-deferred savings, the primary purpose of a life insurance is to provide for your family if you pass away. For that reason, the accumulated cash value is ignored on most financial aid applications such as an FAFSA.

The cash value of a life insurance policy builds slowly over time. Such policies may have the potential of generating a sizable amount in the future, but they take many years to develop, and have very little value during the first decade or so of the policy. Since the average age of a college student is around 26, the likelihood of having any substantial accumulation during your college years is low, so including a life insurance policy in the calculations would not have much, if any, value.

The face value of a life insurance policy is not an amount that you can draw from. The face value has very little use while you are living, even though the amount could be quite large. If you were required to cash in the policy to pay for education, you would not make much of dent in the cost of education with what you would receive, but you would create a potential hardship for others if you die before you buy another policy.

If you were planning to buy a life insurance with the goal of creating a college tuition fund for yourself, think again. It would be much more beneficial to invest in a 529 College Savings Account. This type of account is tax-deferred, and will not be taxed at all so long as the money is used for educational costs. It is better to start saving as early in life as possible, and the most effective 529 plans are begun by parents when their children are young.

Answered February 26, 2014 by Anonymous

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