<p>The way I read it is that the life insurance proceeds CAN be counted as income. They do have to be reported as untaxed income on the FAFSA. I think that individual schools need to be contacted as to how they treat the income and what associated expenses they need to offset it if they are going to do so. A person could have a million dollars in life insurance or more. The family can pay off the mortgage and spend it all on a lot of things. Or a family who loses the wage earner could have zero in life insurance. It’s income that should be considered, logically, the year the family member passes away, but with heavy consideration to funeral expenses and medical costs and other such things. </p>
<p>However, it’s not what makes sense or what we think that holds. It’s what the rules say and how the colleges look at this. It seems to me from reading the FAFSA that life insurance proceeds do have to be reported as non taxable income. Take a look at the rules on it. Certainly CSS Profile would do the same. But with FAFSA, I would think that Fin aid officers can make certain determinations to exclude certain amounts so that PELL eligiblity and other federal aid is not affected. I don’t see any school giving out their own money, however, if a large insurance proceed is received in the key year.</p>