Variable Life combines life insurance with a tax-deferred investment account, and provides tax-free access to the cash value of the policy. Some insurance companies promote variable life insurance policies as a college savings vehicle because the value of the policy is sheltered from financial aid need analysis formulas.

The advantages of a variable life policy are as follows:

  • The money is sheltered from the financial aid need analysis process and has no impact on financial aid.
  • Very high limits on the amounts you can invest.
  • The parent retains control over the money.
  • One can withdraw or borrow contributions tax-free without penalty.

The disadvantages to such policies are as follows:

  • Variable life insurance products tend to be expensive, with high commissions and expenses. The total return after subtracting costs often makes such policies less attractive when compared with other college saving options.
  • The premiums on a variable life insurance policy will eat into the gains you could make from the money you are paying.
  • Premiums are not tax deductible.
  • Withdrawals from a variable life policy will reduce the death benefit.
  • If you withdraw more money than the premiums you paid into the policy, you will pay income taxes on the difference.
  • Withdrawals from a variable life policy cause the insurer to move a portion of the remaining balance into a fixed-return account to minimize the company’s risk.

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