Life insurance question

happymomof1
Wed, 05 Oct 2011 00:20:24 +0000

As I recall, Life Insurance pay-outs are not reported as income. However once they are converted to cash in the bank, or invested somewhere else, they become investments that will be reportable on the FAFSA. If any of the money was in a retirement fund, then that might be able to be rolled-over into a “Beneficiary IRA”. The daughter would be obligated to take minimum withdrawals each year based on her age, but the bulk of the money would be in a retirement vehicle that is not reportable on the FAFSA. At any time she would of course have the option of withdrawing more than the minimum. Not all retirement funds can be converted this way, and the hassle of setting it up might not be worth it to her even if she could.

If the money is coming to the dad, he may be able to roll his share into his own IRA, or set up an annuity. Annuities are tricky things, so he would need to get good advice about that. If the money won’t be needed for a very long time, the dad does have the option of using a chunk of it to purchase life insurance for himself. Again, that would tie it up where FAFSA can’t “see” it. A representative from the insurance company would be happy to explain that kind of option.