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Personal Finance

Using Life Insurance for College Savings? Proceed With Caution

These policies are marketed as a safe way to invest for college, but beware the fine print.

For many families, any discussion about saving for college starts and ends with 529 college-savings plans, tax-advantaged accounts designed for just that purpose. But in some cases families are using a less well-known, and somewhat controversial, approach: cash-value life insurance.

The subject of cash-value life insurance--which includes whole, universal, and variable life--in itself can elicit strong opinions. Critics decry its higher cost--and high commissions paid to salespeople--compared with less expensive term insurance, which pays a death benefit when the policyholder dies but which offers no cash-value benefit and is only good for a fixed time period. Cash-value policies, on the other hand, are good for the life of the policyholder and include a cash-value feature that consists of a portion of the premiums paid on the policy along with interest accrued and, in some cases, investment gains or losses. The policyholder can withdraw funds from this cash value--which has the effect of reducing the death benefit of the policy by the amount withdrawn--or take a loan from the insurance company, using the cash value as collateral and paying interest on the loan.