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.

Advantages

The advantages of a variable life policy are as follows:

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

Disadvantages

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.
• Unlike contributions to retirement accounts and some college savings plans, the premiums are not 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 may cause the insurer to move a portion of the remaining balance into a fixed-return account to minimize the company's risk. This is more likely to occur when the insured borrows against the policy, but it can also happen when the insured withdraws funds from the policy.
• If you die prematurely, your heirs lose the value of the investment account, getting only the death benefit.
• The claims that one can withdraw contributions without penalty is not strictly accurate, since the surrender charges penalize you for withdrawing funds before the 13th year. This limits the usefulness of variable life policies as a college savings vehicle to families with very young children.

Parents with children who are more than three years old should not consider variable life insurance as a college savings vehicle. Parents with children who are less than three years old will often be better off investing in a section 529 plan or Coverdell Education Savings Account.