This is one of the better uses of a policy, and one of the easiest to fumble. The financial aid formula treats assets and income very differently.

As the FAFSA is written today, cash value inside a life insurance policy is not a reportable parent asset. A 529, a brokerage account, and cash in savings all are. Parent assets get counted at a rate that cuts aid eligibility. So a dollar of college money held inside a policy is treated differently than the same dollar held in a taxable account. Aid formulas change. Some colleges use a form called the CSS Profile, and it asks its own questions. A few ask about life insurance directly. Call the school's financial aid office instead of guessing.

Now the part that gets missed. Income is weighted far more heavily than assets in aid formulas, and it's measured on a prior year. A policy loan is not income, since borrowed money generally isn't taxable while the policy stays in force. But a withdrawal above your basis can be, and untaxed income sometimes still gets reported. So the choice between a loan and a withdrawal isn't only a policy question. It's an aid question. And it has to be made before the relevant tax year, not after.

The practical sequence looks like this. Get the funding done well before the first aid application year. Premium payments on their own don't help or hurt the formula. But big money moves during the reporting years muddy the picture. Use loans rather than withdrawals when the policy supports it. And set a payback schedule anyway. Four years of tuition borrowed and never paid back is how a policy ends up loaned to the ceiling by the time the parents turn 60.

I'm a licensed insurance broker rather than a CPA or a financial aid consultant. And this area has real complexity, so run your specific numbers past someone who does aid planning for a living before you commit to a sequence. And if college is the assignment, say so while the policy is still being designed. Get the order right and the policy covers four years of school and keeps working afterward. Get it backwards and you've converted a non-reportable asset into reported income in the year it counted most.