03 Nov Will we get more financial aid if we buy a life insurance policy?

Q. We are set for retirement and talked to a college planner about financial aid. Our income is probably too high for any need-based aid and after our savings, we will be $200,000 short for college for our two kids. He suggested we refinance our mortgage, take out $50,000 and buy an overfunded cash value life insurance policy to keep some of our home equity out of the financial aid picture. I don’t trust life insurance for non-life insurance needs. What do you think of this strategy?
— Parent

A. You’re smart to start planning early to see what your financial situation will mean for financial aid.

As this advisor suggested, life insurance can be used in various financial planning strategies and not just for the insurance itself.

The strategy the college planner suggested would likely exclude the $50,000 home equity from the financial aid picture, said Michael Green, a certified financial planner with GYL Financial Synergies in Parsippany.

That’s because the cash value of a permanent life insurance policy is not included in the Free Application for Federal Student Aid (FAFSA) formula.

However, he said, home equity is not an asset to be reported on the FAFSA either.

Green said if your children apply to one of the approximately 400 colleges and universities that require the College Scholarship Service Profile (CSS), you will be required to include your home equity.

That’s because the parent’s assets on the CSS are calculated at about 5% of the calculation, he said.

Therefore, the $50,000 you are considering removing from your home equity would equate to only $2,500 in the CSS calculation, he said.

Considering all this, Green said the move does not seem like it would give you significant savings.

“In addition, if you then factor the interest you will pay on the additional $50,000 you are borrowing from refinancing your mortgage, it will likely end up costing you more in the long run,” he said.

Good luck to you and your kids’ college futures.

Email your questions to .

This story was originally published on Nov. 3, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.