RPF0429-Whole_Life_Insurance_as_a_College_Savings_Plan
00:00:00.000 | Hey radicals, welcome to the show.
00:00:03.000 | This is Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:00:06.320 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:11.320 | building a plan for financial freedom in 10 years or less.
00:00:14.760 | Broadcasting to you today from a very rainy afternoon here in West Palm Beach, Florida
00:00:21.360 | at the Radical Personal Finance HQ.
00:00:24.240 | And the question of the day comes in from Alan.
00:00:26.840 | Alan writes in and says, "Joshua, what are your thoughts on using whole life insurance
00:00:31.360 | as a college savings plan?
00:00:34.360 | If you don't like it, why?
00:00:36.900 | If you have an episode about this already, let me know which episode number."
00:00:40.160 | Alan, thanks for writing in with the question.
00:00:42.200 | I do not have a separate standalone episode on the topic of using whole life insurance
00:00:49.620 | to save for college.
00:00:51.880 | But I do have some thoughts on the subject.
00:00:54.440 | Now, quick preamble on the topic of whole life insurance.
00:01:00.080 | I am not a partisan on this issue.
00:01:02.880 | I'm not an extremist.
00:01:03.880 | I don't go for the perspective that you should never own or purchase whole life insurance,
00:01:09.840 | nor do I go from the perspective that whole life insurance is the latest, greatest thing
00:01:13.640 | and you should put all of your money from your checking account, savings account, and
00:01:17.400 | withdraw every single investment into a life insurance plan.
00:01:20.960 | I don't buy either of those scenarios myself.
00:01:24.360 | I look at it in a little bit more of a balanced way and say that whole life insurance is a
00:01:29.040 | financial product.
00:01:30.440 | It has certain fundamental attributes, certain fundamental unique characteristics, and those
00:01:37.000 | characteristics are what you weigh and consider to decide what and how you should use the
00:01:43.960 | product.
00:01:45.280 | For any new listeners of Radical Personal Finance, I do not hold a life insurance license.
00:01:51.640 | I used to have life insurance licenses.
00:01:53.920 | I used to be a licensed financial advisor, but I am not licensed to sell life insurance.
00:01:58.840 | I do not have any financial relationships with insurance companies.
00:02:02.840 | So my financial conflicts of interest in this area are nonexistent.
00:02:08.320 | I own whole life insurance policies on me.
00:02:11.980 | My wife has a whole life insurance policy and I own a whole life insurance policy on
00:02:16.640 | each of my children.
00:02:18.720 | However, I do not, would not, and don't recommend the use of a whole life insurance policy as
00:02:29.100 | a college funding plan.
00:02:32.920 | Long time listeners of the show will know that in general I'm opposed to the extreme
00:02:37.620 | prioritization of college saving.
00:02:41.720 | If you have not yet heard it, you should listen to episode 276 of Radical Personal Finance,
00:02:46.720 | which is titled "Why This Financial Planner Refuses to Save Money for His Kid's College."
00:02:52.580 | This financial planner refers to me, Joshua Sheets, and I refuse to save money for my
00:02:58.180 | children's college.
00:03:00.000 | That's not because I'm an irresponsible parent, but because I believe that this is a really
00:03:04.500 | silly thing to do with money when there are many other opportunities and alternatives.
00:03:11.900 | For the sake of this conversation, obviously, I'm going to skip past that opinion and answer
00:03:16.820 | your question directly, assuming that you are desiring to save money for your child's
00:03:23.140 | college.
00:03:25.060 | Whole life insurance should not be the first thing that you consider to save for whole
00:03:30.340 | life insurance.
00:03:31.340 | Also, check the Radical Personal Finance archives.
00:03:33.380 | I've done extensive shows on 529 plans.
00:03:36.300 | I've done extensive shows on the Coverdell Educational Savings Account.
00:03:41.020 | Both of those are superior mechanisms for you to save for your child's education.
00:03:47.080 | The Coverdell Educational Savings Account and the 529 plans have better tax advantages
00:03:53.800 | for you with regard to then life insurance.
00:03:57.560 | You can accumulate the money in those accounts, and as long as you use it for college, you
00:04:01.860 | can distribute the money out of them completely tax-free without ever paying tax on the gain.
00:04:06.980 | That is superior to life insurance.
00:04:09.680 | In addition, you can invest in assets that have a higher potential for growth, whether
00:04:15.220 | that means choosing a selection of stocks and equities, which if you have a long enough
00:04:19.980 | time horizon, will hopefully appreciate at a higher rate than a life insurance policy
00:04:26.340 | will.
00:04:27.340 | Most life insurance policies, whole life insurance policies, are going to be based upon the life
00:04:31.380 | insurance company's general portfolio, their general account, and the majority of that
00:04:36.500 | portfolio is going to be invested in fixed income, very stable and secure assets.
00:04:41.900 | So in general, if you own stocks in a 529 plan and if the stock market appreciated in
00:04:47.340 | a healthy manner, you would usually wind up with more money in that type of account than
00:04:55.820 | you would in a life insurance policy.
00:05:00.700 | If you have other potential opportunities for investments, let's say that you invest
00:05:06.020 | in some unique approach, you buy tax liens or a local real estate investor, etc., you
00:05:14.220 | should look into using a self-directed Coverdell educational savings account.
00:05:18.780 | If you accumulate money in a self-directed Coverdell educational savings account, you
00:05:22.220 | could possibly be able to control your own investments and use the money there from a
00:05:26.940 | Coverdell either to cover primary school expenses or to cover college expenses as well.
00:05:33.260 | So all of those are better options.
00:05:35.460 | But of course, for the sake of this podcast, we want to talk about life insurance as a
00:05:40.540 | college funding mechanism and talk about what's great about it and what's not great about
00:05:46.020 | it.
00:05:47.020 | I said a moment ago that I don't generally recommend and I don't recommend that you start
00:05:51.100 | with using a life insurance policy for college savings.
00:05:54.500 | But I also see many ways that you can use it for college.
00:06:00.580 | Let me give you a couple of ideas.
00:06:02.820 | First, the way that most people think about approaching this I don't think works.
00:06:07.540 | The way that most people think about this is, "Hey, I've got a new child, a young boy,
00:06:11.500 | young girl.
00:06:12.500 | I want to buy a life insurance policy on their life so they are the insured, the parent would
00:06:19.100 | be the owner of the contract.
00:06:20.740 | I'm going to buy this policy on the life of my son or daughter.
00:06:25.180 | This policy will accumulate cash values within it and those cash values will be available
00:06:31.080 | at the age of 18 to pay for college expenses."
00:06:36.780 | I don't think that plan works.
00:06:39.100 | In the years that I worked as an insurance agent selling life insurance, I had many people
00:06:43.580 | ask me about this and I worked and worked and worked on different plans to try to see
00:06:47.900 | if there was any way that I could get the policy to work for that purpose.
00:06:53.100 | I just couldn't make it happen.
00:06:55.260 | The reasons are primarily due to the limitations of using a life insurance contract as this
00:07:01.420 | vehicle.
00:07:02.820 | The first problem with using a life insurance contract as this vehicle is its life insurance.
00:07:08.580 | When you're using a cash value policy, a whole life policy, you have to pay for an insurance
00:07:15.700 | contract that's going to be enforced for a very long time.
00:07:18.020 | You have to pay for the death benefit.
00:07:20.420 | With children, it seems like the ratio of expenses is very high.
00:07:26.820 | Usually you're buying generally pretty small policies.
00:07:29.820 | You can't buy a $5 million insurance policy on your child unless you have a $50 million
00:07:35.620 | policy on you and that's just not the world that most of us are living in.
00:07:40.660 | It always seems like the ratio of the cost of insurance is very, very high on those policies.
00:07:46.580 | Not actuarially, just simply in the short term.
00:07:51.220 | The big problem with life insurance contracts when they're measured on the spectrum of is
00:07:58.340 | this a good use of money as for an investment, for cash accumulation, is all the expenses
00:08:03.740 | come out up front.
00:08:05.700 | In general, whole life insurance policies accumulate cash very slowly in the beginning
00:08:10.620 | years.
00:08:11.620 | The reasons for that are numerous.
00:08:14.380 | First, there is a heavy expense in the first year of a life insurance contract to pay the
00:08:20.420 | commission to the life insurance agent who sells the policy.
00:08:24.420 | That commission rate is generally at least 50% and it can range to as high as 100% depending
00:08:30.620 | on the company and depending on the contract.
00:08:33.820 | That's a heavy chunk of cost and all of that cost comes right out of the policy.
00:08:38.060 | The company themselves are paying that commission to the agent.
00:08:43.540 | Well, there's no free money.
00:08:45.700 | The insurance company isn't printing money to pay the commission from some other account.
00:08:50.000 | That's coming out of the policy.
00:08:52.140 | You have a heavy commission up front in a whole life insurance contract.
00:08:56.980 | You also have significant expenses that the insurance company charges to the contract
00:09:02.980 | in the beginning years.
00:09:04.500 | Obviously, there's the big one which is mortality and expense.
00:09:09.660 | The mortality and expense charge just simply reflects the cost of the insurance.
00:09:15.320 | When you buy an insurance policy, the insurance company is on the hook from day one to take
00:09:21.020 | that money and to pay a death claim if you die or if the child dies in this case.
00:09:28.540 | Given this commitment, they have to set aside a significant amount of money up front to
00:09:34.820 | start to accumulate to pay that death benefit.
00:09:37.540 | They pull out those mortality and expense charges in the beginning.
00:09:40.300 | Now, of course, there are other expenses.
00:09:42.580 | These are not necessarily directly reflected in the policy, but there are underwriting
00:09:46.900 | expenses.
00:09:47.900 | There are medical expenses and the insurance company has to pay for those in the early
00:09:51.660 | years as well.
00:09:53.820 | Whole life insurance policies in the first year generally accumulate almost no cash value.
00:10:01.020 | The purchase of a whole life insurance policy is one of the worst things that you can do
00:10:07.140 | if you keep the policy for a very short time.
00:10:12.580 | It will be extremely expensive.
00:10:16.420 | You never purchase a policy that you're only planning to keep for a short time.
00:10:20.660 | The only place that whole life insurance will be useful to you is for the accumulation of
00:10:26.220 | money that's going to be for a very long time.
00:10:30.940 | The minimum amount of time is probably at least 15 to 20 years.
00:10:37.500 | That's the fundamental problem with using life insurance contracts for saving for a
00:10:42.420 | child's college.
00:10:44.820 | When you actually run the numbers, run the proposals, you're going to have heavy expenses
00:10:49.700 | in the early years and it takes them a long time to build up and accumulate cash.
00:10:59.460 | There are some policies.
00:11:00.620 | I've talked to college planning experts, some of whom are also life insurance agents,
00:11:05.900 | and they use specially designed policies that are partly designed for this purpose.
00:11:12.160 | I've never been convinced.
00:11:13.220 | I've never seen the proposal.
00:11:14.260 | If any of you work in that business, I would ask you to send me some proposals.
00:11:18.180 | Run them for some sample children and let me look at the numbers.
00:11:20.980 | Let me look at the ledgers and understand.
00:11:22.940 | I've never in my career found one that worked, that I looked at it and said it was a good
00:11:29.260 | use of the dollar.
00:11:30.260 | I never sold a client a whole life insurance policy on his or her child with the goal of
00:11:36.540 | using that policy to pay for college.
00:11:41.820 | One final point on why and then we'll move on to how you can use life insurance to pay
00:11:45.900 | for college.
00:11:47.660 | The other major thing to recognize is why are you doing all this?
00:11:51.340 | Why are you buying a cash value policy?
00:11:54.060 | You say, "Well, I'm buying it for the investment component."
00:11:56.620 | Okay.
00:11:57.620 | If that's the case, you're going to be accumulating money in the contract in a very
00:12:03.220 | safe manner.
00:12:06.340 | You basically own what's equivalent to a fixed income portfolio.
00:12:11.580 | It's going to be very, very steady growth.
00:12:12.820 | That's going to save some of the volatility.
00:12:14.740 | But the other thing that people talk about is with regard to the tax benefits.
00:12:20.300 | The problem with these contracts is they don't accumulate many gains and because they don't
00:12:23.780 | accumulate many gains, you don't actually save that much on taxes.
00:12:27.620 | So the tax benefits are negligible.
00:12:30.860 | Finally, what about the benefit of the – the much vaunted benefit that money that's accumulated
00:12:39.980 | as cash value in a life insurance policy is not reported on the FAFSA, the Free Application
00:12:45.860 | for Federal Student Aid?
00:12:47.600 | This is true.
00:12:49.400 | The FAFSA doesn't consider cash value life insurance as an asset.
00:12:55.140 | But this can be misleading for a couple of reasons.
00:12:58.500 | Number one, that's not the only asset that is not considered on the FAFSA.
00:13:04.180 | For example, what about money that's accumulated in a qualified retirement account?
00:13:08.900 | That can be done.
00:13:10.020 | That money is not reported on a FAFSA.
00:13:12.780 | Let me read to you directly from the FAFSA and show you how certain assets are treated
00:13:19.300 | and how certain assets are not treated.
00:13:20.700 | So I'm reading here from the notes instructions from the FAFSA, the Free Application for Federal
00:13:27.380 | Student Aid, from their instructions here.
00:13:29.860 | These instructions would be – are the same notes where the student is reporting their
00:13:35.300 | income and their assets and also for the parent.
00:13:40.020 | When the parent is listing – when the parent or student is listing the net worth, here
00:13:43.940 | are the definitions.
00:13:46.220 | Net worth means the current value as of today of investments, businesses, and/or investment
00:13:54.300 | farms minus debts related to those same investments, businesses, and/or investment farms.
00:14:02.020 | In calculating net worth, use zero for investments or properties with a negative value.
00:14:06.940 | Investments include real estate.
00:14:09.620 | Do not include the home in which you live.
00:14:12.620 | Rental property includes a unit within a family home that has its own entrance, kitchen, and
00:14:17.140 | bath rented to someone other than a family member.
00:14:20.500 | Trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of
00:14:29.220 | deposit, stocks, stock options, bonds, other securities, installment and land sale contracts
00:14:38.260 | including mortgages held, commodities, etc.
00:14:43.700 | Investments also include qualified educational benefits or education savings accounts.
00:14:50.180 | Example Coverdell savings accounts, 529 college savings plans, and the refund value of 529
00:14:55.660 | prepaid tuition plans.
00:14:57.820 | For a student who does not report parental information, the accounts owned by the student
00:15:02.180 | and/or the student's spouse are reported as student investments in Question 42.
00:15:07.000 | For students who must report parental information, the accounts are reported as parental investments
00:15:10.860 | in Question 91, including all accounts owned by the student and all accounts owned by the
00:15:15.540 | parents for any member of the household.
00:15:17.980 | Money received or paid on your behalf also includes distributions to you, the student
00:15:22.140 | beneficiary, from a 529 plan that is owned by someone other than you or your parents,
00:15:27.700 | such as your grandparents, aunts, uncles, and non-custodial parents.
00:15:31.500 | You must include these distribution amounts in Question 45J.
00:15:34.540 | Now let's get to the big ones here.
00:15:37.340 | Investments do not include, so everything before was things that are included, investments
00:15:41.620 | do not include the home you live in, the value of life insurance, retirement plans, 401(k)
00:15:49.500 | plans, pension funds, annuities, non-education IRAs, Keogh plans, etc. or cash savings and
00:15:55.660 | checking accounts already reported in Questions 41 and 90.
00:16:00.540 | Investments also do not include UGMA and UTMA accounts for which you are the custodian but
00:16:04.660 | not the owner.
00:16:07.060 | Investment value means the current balance or market value of these investments as of
00:16:11.980 | today.
00:16:13.140 | Investment debt means only those debts that are related to the investments.
00:16:16.740 | Business and/or investment farm value includes the market value of land, buildings, machinery,
00:16:22.940 | equipment, inventory, etc.
00:16:27.020 | Business value does not include the value of a small business if your family owns and
00:16:38.620 | controls more than 50% of the business and the business has 100 or fewer full-time or
00:16:45.900 | full-time equivalent employees.
00:16:52.300 | Business value does not include the value of a small business if your family owns and
00:16:58.020 | controls more than 50% of the business and the business has 100 or fewer full-time or
00:17:05.660 | full-time equivalent employees.
00:17:08.100 | For small business value, your family includes 1) persons directly related to you such as
00:17:12.700 | a parent, sister, or cousin and/or 2) persons who are or were related to you by marriage
00:17:18.360 | such as a spouse, step-parent, or sister-in-law.
00:17:22.280 | Investment farm value does not include the value of a family farm that you, your spouse,
00:17:30.100 | and/or your parents live on and operate.
00:17:33.460 | I read these things to you to demonstrate to you that often there are many ways that
00:17:39.820 | you can have assets that are not reported on the FAFSA.
00:17:43.980 | So yes, life insurance is one of those assets and you should consider that when potentially
00:17:49.460 | owning a life insurance policy.
00:17:51.620 | However, you can also do the same thing with say an IRA or Roth IRA.
00:17:58.700 | You can do the same thing with a Roth IRA for you.
00:18:00.500 | You can do the same thing with a Roth IRA for your child.
00:18:02.900 | You can also pursue strategies such as paying off your mortgage before you, if you have
00:18:08.100 | a bunch of money sitting in investment accounts or in checking or savings accounts and you
00:18:13.580 | need to apply for the FAFSA, then consider wiping out your mortgage debt and putting
00:18:19.600 | all that money into home equity because the home equity in your principal residence will
00:18:23.820 | not be reported on the FAFSA or possibly owning your own business, small business.
00:18:32.980 | So you need to read these, read documents for yourself is my point.
00:18:37.220 | Hard to do, easy to say, hard to do, but it's important.
00:18:40.180 | So in short, these are the reasons why I don't think it's a good plan to pursue the purchase
00:18:46.900 | of a life insurance policy for your children as a primary means of funding college.
00:18:53.460 | I think there are better ways.
00:18:55.260 | I think there are more efficient ways.
00:18:57.500 | College funding accounts are superior.
00:19:00.620 | I think that there are other ways with – again, IRA is even superior, Roth IRA, make distributions
00:19:08.920 | at college age to cover that.
00:19:11.360 | So all of these ways are superior.
00:19:16.300 | There are other things that you can do and when you actually look at a life insurance
00:19:20.780 | contract and see the problems with it, the costs are up front, the investment return
00:19:25.900 | is generally low over the short term like that, the tax savings are negligible because
00:19:30.580 | the investment return is so low and the life insurance policy breaks down.
00:19:36.980 | That does not mean I don't recommend you consider purchasing a whole life insurance
00:19:41.500 | contract for your child.
00:19:44.260 | I own them for my children.
00:19:46.180 | Does it make it right?
00:19:47.700 | Does it mean your situation is the same as mine?
00:19:50.020 | Does it mean you value the same things that I value?
00:19:52.460 | Just simply saying I'm not opposed to your purchasing whole life insurance contracts
00:19:55.580 | for your children.
00:19:56.580 | I'm opposed to your purchasing whole life insurance contract for your children as a
00:20:01.060 | primary means of paying for college or where the primary motivation is not the benefit
00:20:06.620 | of owning the life insurance contract, having the death benefit in place, the benefit of
00:20:11.200 | having and protecting your child's ability to buy insurance in the future or the benefit
00:20:16.620 | of having some cash value accumulation over the long term but that will be after college.
00:20:23.980 | Just opposed to using it as a primary vehicle for college funding.
00:20:31.860 | Now how could you use life insurance in an effective and efficient way to pay for college?
00:20:41.140 | Notice that all of the previous conversation was reflective of a life insurance contract
00:20:50.300 | where your child is the insured.
00:20:54.420 | What if your child is not the insured?
00:20:56.660 | Well, if your child is not the insured, that opens up many more options and many more opportunities.
00:21:07.100 | Let's pretend for a moment that you don't have children yet.
00:21:11.900 | Just go with an ideal scenario.
00:21:14.700 | Could you purchase a large whole life insurance policy that will accumulate cash value effectively
00:21:22.580 | over the next 15 to 20 to 25 years with the intention of keeping it in force for much
00:21:28.800 | longer than that?
00:21:31.860 | You absolutely could and that's one of the ways that life insurance contracts can be
00:21:36.220 | used.
00:21:37.220 | Because it's not tied to the life of your child, you would be able to buy a larger contract
00:21:40.580 | to be able to get more money into it where the savings were more meaningful.
00:21:44.860 | Because the policy were flexible, you wouldn't have to use it for college if you found other
00:21:50.340 | opportunities, other alternatives.
00:21:55.020 | Now what if you bought such a contract and you scheduled it to make sure that during
00:22:01.460 | the time that your child is in college, you wouldn't have to make premium payments if
00:22:05.180 | you didn't want to?
00:22:08.180 | This is my favorite plan.
00:22:09.740 | This is what I did a couple of times as an insurance agent.
00:22:14.100 | As long-time listeners of the show will know, I'm pretty good at talking people out of saving
00:22:19.780 | in college savings accounts.
00:22:23.700 | If it's important to you, great, but I'm pretty good at talking people out of it, simply recognizing
00:22:30.820 | that that shouldn't be the first place to focus.
00:22:35.740 | Wealthy parents pay for college for their children.
00:22:40.380 | So let's focus on being wealthy and let's make sure that we're flexible during that
00:22:45.140 | time we're paying for college.
00:22:47.100 | Because the college situation is so unknown, we don't know what the FAFSA is going to be
00:22:55.060 | in 15 years.
00:22:56.500 | We don't know who the president is going to be.
00:22:58.300 | We don't know if college is going to be free.
00:23:01.860 | I personally, now who knows, my politics, my political crystal ball is often wrong,
00:23:10.340 | but I see very good indication to say that there will be many options to go to college
00:23:15.780 | without paying out of pocket for it in 15 years, 10 to 15 years.
00:23:21.900 | Today, any student who is academically capable and wants to can earn enough money working
00:23:30.100 | part-time at a fast food restaurant to pay and get an accredited degree from a low cost
00:23:36.460 | online university or distance learning or local community college.
00:23:40.860 | It's not hard to pay for college.
00:23:44.660 | So I like the parent to have flexibility.
00:23:47.140 | So what I have often done, if the parent has the desire or the need or the desire to own
00:23:54.460 | life insurance, if it fills some of those financial goals, their financial needs, the
00:23:59.780 | primary one being, "Hey, I want to have a whole life insurance contract that stays in
00:24:04.480 | force forever.
00:24:05.480 | I'm well insured for the temporary needs.
00:24:08.780 | Temporary life insurance needs should always be covered with term life insurance, but I'd
00:24:11.820 | like to have some insurance that lasts forever."
00:24:14.860 | That's a really good start to fit to say, "Oh, life insurance is an appropriate fit."
00:24:19.300 | I'd like to have some money accumulating within a life insurance contract.
00:24:23.180 | I like to keep some of my portfolio in a place that is safe where it's steady growth.
00:24:28.380 | I know that I'm giving up a significant amount of potential upside in terms of my total return,
00:24:34.500 | but I like to have some money that's safe and steady.
00:24:37.140 | It makes me feel good that it's protected from annual taxation.
00:24:41.100 | It's growing tax deferred.
00:24:42.460 | Yes, I may or may not pay taxes on it when I take it out, but it's growing tax deferred
00:24:46.460 | for now.
00:24:47.460 | I like the flexibility of it.
00:24:49.500 | If the client, notice that was pretty elegant sales language there, and that wasn't as elegant
00:24:54.500 | as I could make it, but if the prospective client or prospective purchaser of a life
00:24:59.800 | insurance contract is using phrases like that or is agreeing to phrases like that, now we
00:25:07.340 | have a good fit for life insurance.
00:25:10.260 | How do we design it so that they can use the policy for college?
00:25:15.220 | My first goal is that they not use the policy for college.
00:25:19.820 | My goal is that they just pay for college.
00:25:22.780 | What I would do in a financial planning situation is I would work very hard to make sure that
00:25:27.900 | if a parent knows the years that their child is likely to be in college in advance, they
00:25:32.980 | work hard to lower their expenses during those years.
00:25:38.500 | That means get on track to have a mortgage paid off during those college years if possible.
00:25:43.620 | It's very reasonable that many parents in the younger years, whether children are young
00:25:49.340 | and they're starting to think about buying college accounts, because after all, that's
00:25:52.380 | the scenario we're in here of buying a life insurance contract at an early age.
00:25:56.300 | This doesn't work if you're looking at a 10-year-old.
00:25:59.780 | It doesn't work at all, but it certainly doesn't work with a 10-year-old.
00:26:03.700 | It works the best for a one-month-old, and even there it doesn't work.
00:26:08.340 | It just doesn't work to buy the contract the way that most people think about.
00:26:13.100 | But can you have a house paid off by the time your child is 18 years old?
00:26:20.300 | Many people, if not most, who think ahead and plan can be in a situation where they
00:26:26.260 | have their house paid off when their child is 18 years old and heading off to college.
00:26:31.180 | If you don't have a personal mortgage payment to make every month, can you afford to make
00:26:35.500 | payments to a university?
00:26:39.580 | The answer is yes.
00:26:41.140 | But let's go a little farther than that.
00:26:42.720 | Can you make sure that your cars are paid off during that time period?
00:26:47.380 | Very few people think strategically about their needs for transportation.
00:26:50.060 | They don't time it.
00:26:51.060 | They sign up for a loan and they don't know how long it's going to last, and they just
00:26:54.020 | don't think about it.
00:26:55.620 | Think about it.
00:26:56.700 | Make sure that you don't wind up making car payments during the years in which your child
00:27:02.420 | is in college.
00:27:04.460 | Let's say your mortgage payment was $1,000.
00:27:07.380 | Now let's take away a $400 car payment.
00:27:11.020 | We're at $1,400.
00:27:13.580 | $1,400 a month buys you a lot of tuition, and you can do it without stress.
00:27:21.340 | The tax savings of saving for college, because it's so short term, are negligible.
00:27:28.020 | I'd rather you just pay out of cash flow in general.
00:27:32.100 | Now if you've saved diligently in retirement accounts, can you also have those assets not
00:27:40.300 | be listed on your FAFSA so that they're not counted against your child's financial aid
00:27:49.100 | opportunities?
00:27:51.100 | Yes.
00:27:53.100 | If you've saved in something like a Roth IRA, you can take out your contributions and use
00:27:59.900 | that money without paying any income tax because we're just distributing contributions.
00:28:05.060 | You can use that money to pay for college if you desire, and you can leave your earnings
00:28:08.420 | inside the Roth IRA to grow tax-free.
00:28:13.820 | In addition, if you've saved diligently into your retirement accounts all along the way,
00:28:25.420 | can you stop making contributions or at least not make contributions beyond the employer
00:28:30.500 | match during the years that your child is in college?
00:28:33.860 | The answer is yes, you can.
00:28:37.820 | I believe that in general, that option would pay off much more than buying a life insurance
00:28:42.260 | policy on your child's life.
00:28:45.020 | Better approach.
00:28:46.020 | Then finally, what about life insurance?
00:28:49.940 | You thought I forgot, didn't you?
00:28:53.900 | What about life insurance?
00:28:56.340 | Buy a life insurance contract that has no premiums due during the years your child is
00:29:00.540 | in college so that you can do exactly the same thing.
00:29:04.140 | If you're going to buy a whole life policy, schedule it to quick pay in about 15 years
00:29:09.980 | if you have a child who's younger so that you can drop that off.
00:29:17.320 | Even if your policy is not scheduled to quick pay, quick pay meaning you either stop contributing
00:29:23.120 | to the contract or just have the dividends pay the premiums for you, start taking your
00:29:28.320 | dividends and apply your dividends to the premium.
00:29:31.140 | There you can free up a few hundred dollars.
00:29:32.500 | I'd much rather somebody have a life insurance contract and with let's say that at that point
00:29:39.300 | in time their premiums are $500 a month, but at that point they've got the equivalent of
00:29:44.100 | $350 a month of dividends.
00:29:47.380 | Let's just apply those dividends to the premium payment.
00:29:49.740 | They pay out of pocket $150 and the other $350 a month gets freed up to be used for
00:29:55.280 | tuition payments.
00:29:57.780 | If your child winds up going to an elite Ivy League school and you've accumulated money
00:30:03.960 | in all of those scenarios and you need to take money out of the life insurance policy,
00:30:10.260 | if you've got a big policy for you or a big policy for your wife, that's a really good
00:30:18.280 | way to do it.
00:30:19.720 | Just take out a loan on your big policy, use that to pay the tuition payments and then
00:30:24.960 | pay the loan back on your life insurance contract over a short period of time.
00:30:29.960 | That's the most efficient way to do it.
00:30:35.120 | Because you're taking the money out of your life insurance contract in the form of a loan,
00:30:39.360 | there's no income reported.
00:30:40.720 | Because there's no income reported, there's no income reported on the FAFSA.
00:30:45.020 | You continue to be in good shape where your FAFSA is well set up and you've accumulated
00:30:52.140 | money in a very efficient way.
00:30:57.900 | Hope that's helpful.
00:30:59.180 | Hope that's clear.
00:31:00.740 | In summary, the question is this, what are your thoughts on using whole life insurance
00:31:05.780 | as a college savings plan?
00:31:07.860 | If you don't like it, why?
00:31:10.620 | Direct summary or answer to that question, summary of the show is this.
00:31:14.660 | I don't think life insurance contracts on the life of your children work well for college
00:31:22.620 | savings because I've never seen one that accumulated enough money where it was worth the hassle.
00:31:28.760 | This is due to the fundamental characteristics of whole life insurance where the costs are
00:31:32.300 | up front, the investment return tends to be lower than other opportunities because it's
00:31:38.160 | a fixed income portfolio, and the tax savings are generally negligible because of the low
00:31:43.080 | investment return and because of the short period of time for the money to grow.
00:31:50.580 | So I don't recommend that you use that as a primary way of paying for college.
00:31:55.720 | There are more efficient ways.
00:31:57.620 | I do recommend that you can consider using a whole life insurance contract on yourself
00:32:05.060 | or on your spouse, and that can be a backup plan for college.
00:32:10.700 | But my favorite way to pay for college is just simply for you not to save for college,
00:32:18.040 | but for you to plan to pay out of pocket for college when that time arrives.
00:32:24.460 | That in my opinion is the very best way to do it.
00:32:27.900 | Don't forget about all the other fundamentals, shop for college aggressively, apply for student
00:32:33.300 | loans aggressively, et cetera.
00:32:35.920 | But I think that's the best way to use life insurance to plan for college.
00:32:41.560 | That's it for my show today.
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