Life Insurance FAFSA Rule – Excluded Student Aid Asset

Life Insurance Benefits and Student Aid – A FAFSA Exclusion:

Should you be investing in whole life insurance? Take a look at life insurance FAFSA rules.

Did you know that parents who have invested money in life insurance are able to exclude this amount from the Free Application for Federal Student Aid?

On the FAFSA, the cash value of life insurance is treated in a similar manner as retirement accounts. Parents are not expected to contribute from these funds for college expenses, so these funds are not assessed in the Expected Family Contribution (EFC) calculation.

On Oct. 14, 2011, the New York Times, Wealth Matters section, featured a full article by Paul Sullivan, titled In a Volatile Market, Some Turn to Insurance Instead of Bonds. Sullivan discusses the pros and cons of life insurance and how in our volatile market, some advisors are encouraging investing in permanent life insurance, also known as whole life.

I’m all in favor of life insurance as part of parents’ balanced financial portfolio, but it needs to be the right type of life insurance (whole life) with a credible company.

An entire chapter of the book, How You Can Maximize Student Aid is dedicated toward explaining how FAFSA rules treat whole life insurance and how whole life insurance can be used as a tool to propel your family’s financial stability forward by sheltering funds from Federal student aid calculations.

I’m not going to reiterate this chapter of my book here, but instead, touch on some of the concerns proposed in building a cash value in life insurance.

Overlooked FAFSA Exclusion – Life Insurance Cash Value

I feel like critics of life insurance always fail to recognize the FAFSA computation benefit. I have to wonder if they are just unfamiliar with the FAFSA exclusion, or do they just want clients to skip life insurance and fully invest in other venues — their venues?

I mean, if we are going to compare investment choices for parents, you have to look at all aspects.

Suppose I invest in $10,000 in whole life insurance and you invest in $10,000 in stocks. To make the scenario equal, let’s assume they both grow at 3% rate. Assuming all other factors are equal, when college rolls around, I am not expected to cash in any of my life insurance, but you will be expected to cash in some of your stocks. Will you be happy with your investment choice?

Overfunded Whole Life Insurance is Expensive

Life insurance is an expensive investment:

  • You need to overfund your plan to have it perform as an investment
  • You will pay high fees

Those against life insurance often bring up the fees involved. While this is a credible statement, almost all investments have fees. After all, do we really expect companies, brokers, and financial advisors to manage our money for free? That would be awfully kind of them.

What’s really important is the final result. Suppose you have $10,000 and I have $10,000, and we both choose financial advisors to handle the growth of our money, but your advisor charges 5% in fees and mine charges 8% in fees. If after a year, I have $15,000 and you have $12,000, do you think I really care that I paid more in fees?

My only point here is — lets not choose investment based on the fees charged. Investment performance is what ultimately counts.

What Is Life Insurance and How Does It Work?

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See the book, How You Can Maximize Student Aid to learn more about:

  • FAFSA rules,
  • Whole life insurance,
  • How to borrow from life insurance for student loans

FAFSA Life Insurance Logic

I recall visiting a college fair with my prospective fashion design student. There were over 500 college booths where students could visit, pick up brochures, and ask questions. My daughter asked one advisor, “Are there a lot of fabric stores nearby?”

While I understand her line of thinking, I was also astounded. Surely we were not going to choose a college based on where we might shop?

And surely, you should not invest in whole life insurance solely based on its exclusion from the FAFSA (and the fact that it might increase the amount your family will receive in Federal student aid).

However, when you weigh all the whole life insurance pros and cons, you just might find that life insurance is a beneficial option to add diversity to your family’s financial portfolio.

The Kid’s Roth IRA Handbook has an entire chapter on using Life Insurance as part of your family financial plan for college.