Getting Your Financial Ducks In A Row Rotating Header Image

2 Comments

  1. bob chambers says:

    About half of what you said about life insurance is semi-correct, the other half is garbage and the person you asked for help on the post, Scott Witt, an insurance professional? should know more about life insurance. Let me start by saying, I’m not rich or ultra rich, but I did learn about using life insurance as a college funding vehicle several years ago and am currently using it to put my two sons through college.

    I could list twenty things incorrect, but here are a few.

    You say 529 have very high contribution amounts. Not as high as the 50K Ive been able to add to my life insurance policies each year. A life insurance contract can hold a lot of money. And if you run out of room in your policy, insure your spouse or children. A 529 can’t hold as much as an insurance policy when properly designed.

    You say overfunding life insurance will cause it to lose it’s tax favored status. That’s why you work with an agent that designs a policy to be as close to the max premium level without losing the favorable tax status.

    You say you must be insurable. You can insure your spouse or children and use the insurance policy to fund any one of the children’s college education.

    You say insurance premiums are not flexible. A correctly designed policy has a ton of funding flexibility. I can go from 400/month to 2500/month.

    My cash value didn’t take long to build, it was there after my first premium payment and has been growing risk free ever since. And you are correct, I don’t have access to ALL of my cash value, just 90% of it, which is fine with me.

    You say life insurance is full of fees. Sure, the 529 plans don’t contain fees and expenses?

    529s can’t pay for a college commuting car, a semester off or abroad, or non college tuition/room/board.

    529’s are tax free, sure so it’s my life insurance withdrawals or loans.

    529s contain risk, whole life insurance contains no risk so you know exactly how much you will have in the account at the exact time you need it. With a 529 plan, you make take a market loss and never get back to break even.

    529s don’t “self complete.” If I pass away, my life insurance “self completes” and provides an instant fully funded college account.

    None of the reasons you stated as examples of when to use life insurance are “rare.” 90 percent of the folks I talk to have no insurance or are underinsured. I’ve seen one substandard policy in 5 years. I’m not rich or ultra rich, I just studied life insurance as a financial vehicle and I”m glad I wasn’t lured into a 529 for my families college funding.

    I could go on and on, but I’m shocked this article was written by an insurance professional and he couldn’t accurately compare an insurance policy with a 529 plan.

    1. sraskie says:

      Hi Bob,

      Thank you for your candor. Let me reply by line item to your comments.

      529 contribution limits are very high. This is not incorrect. Additionally, a married couple can fund a single 529 with $28,000 annually (with a potential state tax deduction), which over 15 years, is $420,000 (some state caps will apply) for college (not including growth/interest). They can do the same per child. So, 2 children would allow $56,000 annually – total over 15 years = $840,000. I’m not sure why you’d need a life policy to hold more.

      Improperly over-funding will cause a life policy to lose tax-favored status. This is not incorrect. Proper policy design is necessary to avoid MEC status. I mentioned this in the article.

      Regardless of who has the insurance, the insured must be insurable. This is not incorrect. 529s require no underwriting.

      The article mentions ordinary whole life insurance offers no premium flexibility. This is not incorrect. UL and VUL offer premium flexibility. Perhaps this is what you are referring to.

      Cash value does take time to build. Unless someone over-funds the policy correctly right away (as mentioned in the article). Most people do not, and are unaware of how/why to do this. Most sales people don’t know either.

      Many 529 plans offer very inexpensive funds. For example, I pay about 3 to 4 basis points for my fund holdings. Much cheaper than M&E in a life policy. Plus, I get the state tax deduction.

      529s are for college expenses. They aren’t savings vehicles for non-college items like travel, vehicles, etc., and were never meant to be. Neither was life insurance. A job can just as easily pay for a semester off.

      Qualified 529 withdrawals are tax-free. This is not incorrect. So are life policy loans and withdrawals. The article mentioned this. You simply restated it.

      Yes, 529s may carry investment risk. Hence the article mentioning one of the rare instances where it may make sense for a very conservative person; assuming they can afford it, are insurable, and can find a professional qualified to design the policy. Or they may consider a 529, invest it in a money market fund (no risk), and still get the tax advantages.

      Term insurance does the same thing, for much less. However, the death benefit should include college funding (as well as income replacement, retirement, etc.).

      It sounds like you sell life insurance. When all you have is a hammer….

      Again, thank you for your comments.

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