Can You Successfully Use Life Insurance to Shelter Assets from FAFSA/CSS?

My previous post discussed ways to move your assets away from reportable investment accounts.

You can review FAFSA or walk through the CSS Profile, but here are the essential pieces I took directly from the two:


Investments include:

  • real estate (besides primary residence)
  •  trust funds
  •  UGMA/UTMA accounts
  •  Coverdell savings accounts, 529 college savings plans
  •  money market and mutual funds
  •  certificates of deposit
  •  stocks, stock options, bonds & other securities
  •  installment and land sale contracts
  •  commodities
  •  etc.

Investments exclude:

  • home you live in
  •  value of life insurance
  •  ABLE accounts
  •  retirement plans

CSS Profile

Investments include the parents’:

  •  529 college savings, pre-paid tuition, and other college savings plans
  •  stocks and stock options
  •  bonds, savings bonds, and mutual funds
  •  money market funds and certificates of deposit
  •  non-retirement annuities
  •  trust funds, commodities, precious and strategic metals, installment and land sale contracts, and other valuables

 Investments do not include the parents’:

  •  home
  •  business, farm, and real-estate
  •  retirement plans

CSS Strikes Again

You will notice that “non-retirement annuities” will be included as investments for the CSS Profile. But this does not mean life insurance. All schools do not require the cash value of life insurance. If you want to shelter assets with life insurance, make sure your child will attend a FAFSA school or a CSS school that doesn’t treat life insurance as an asset.

Different Types of Insurance

There are multiple types of life insurance, usually sold by salespeople who make a commission. It would help to be fully educated before agreeing to move your money into one of these products.

If you are moving your money around, you want to be able to get it back later. So, do not sign up for term life insurance. But, you could put a few thousand into burial life insurance.

Whole, universal, and variable are the three options that provide a cash value.

Whole life insurance has both a death benefit and a savings portion. Interest on the savings portion grows tax-deferred. You can access the cash savings tax-free up to the principal amount. You can also recoup your money if you pay a surrender fee. This can be 10% after the first year and down to 0% after ten years.

Universal life insurance offers more flexibility over premium costs, and your cash value can increase.

Variable life insurance is a form of universal life insurance that allows you to invest your money similarly to your retirement accounts. Enabling you to invest your cash comes with administration fees.

Single Premium Life

Life insurance could be used to shelter money as it functions similarly to a Roth IRA in many ways. But you want to use life insurance differently than most people. You do not want to pay monthly premiums to build your life insurance; you want to move your cash into a life insurance policy. You want to spend one significant premium to front-load your account.

Here’s a simple summary of State Farm‘s offering. It’s straightforward enough until you hit the pesky note, which tells you that you can’t access the cash value without the money being treated like income with a 10% fee. This is because it is a Modified Endowment Contract.

This is okay, though. The 10% fee is on the amount you take out, not the account’s total value. If you can survive on $50K/year you would lose $5,000 a year.

The Fees

No matter where I turned, everywhere fees followed. It is only possible to find fees the companies charge you by going through the process of getting a quote, and I do not want to do that.

Aflac says there is a “sizable fee upfront.” Looking at Reddit, one user said there was an 8% fee on initial funding and then a 1.35% management fee on your money.

There is a world where if your child is going to pay $80K for a private college, sheltering $1 Million in life insurance could be beneficial. But you must get the exact numbers from companies and be confident you can access your money quickly. It’s not something I’m desperate enough to try currently.

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