I was recently informed of a strategy that a fairly large insurance carrier is promoting here in Huntsville. It is using a whole life policy to fund children’s education. This is how it works: you purchase a life insurance policy on your child and it will build up enough cash value that you can use it to help fund the child’s education. Wow, I can’t begin to think of a worse idea than this. First off, this is the most expensive way to do this ever, the value takes years and years to build up, the returns on this aren’t very good either (maybe 4%?), and it isn’t tax deductible. In fact, if you aren’t careful and you take out too much money (also called a policy loan, let that sink in), the policy lapses, and you will pay taxes on the amount in excess of what you paid in premiums. This strategy is very effective for funding the life insurance salesman’s children’s college education however.
The 529 plans are by far and above better than the life insurance strategy. For starters, the amount you put into is tax deductible and if the
Here is the bottom line. Life insurance isn’t an investment. Life insurance policies are contracts between you and the insurance company. You pay the premiums; the insurance company pays a death benefit. Death benefits are used to cover income and expenses, provide inheritances and can also be used in blended families as an equalizer for the other spouse’s children. Life insurance is a terrible way to fund your child’s education. If you would like further assistance with planning for your children or grandchildren, we would be honored to help.
Mike
Mike Mickels is President of CochranMickels Retirement Specialists and an avid sporting clay competitor. CochranMickels Retirement Specialists provides personalized planning and investment services to individuals approaching and in retirement. They also provide retirement and benefits training to Federal employees. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc, a Registered Investment Advisor. CochranMickels and Cambridge are not affiliated. Mike Mickels is President of CochranMickels Retirement Specialists and an avid sporting clay competitor. CochranMickels Retirement Specialists provides personalized planning and investment services to individuals approaching and in retirement. They also provide retirement and benefits training to Federal employees. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc, a Registered Investment Advisor. CochranMickels and Cambridge are not affiliated.