I've just had a fascinating e-mail. A grandparent had mentioned to a friend (who happens to sell insurance) that he was thinking about starting up a 529 for his recently born grandchild, as he'd done for his other two grandchildren.
The friend immediately told him "Oh, don't make *that* mistake!" Instead, give your grandchild the "Gift of a Lifetime" - (that seems to be what they're calling this use of their product) - by buying the child a 10-pay permanent life insurance policy, apparently a VUL policy. (Note - the policy is on the life of the *child* and the owner of the policy is either intended to be the child via UGMA or the parent of the child)
It's a fascinating idea. Since the child is so young, the actual insurance costs are very very small. The illustration given included making 10 annual payments of $10,000 each to the policy, after which it'd be fully endowed and the death benefit of as much as more than $1million (for the young girl grandchild) (and well over $700,000 for the oldest grandson) would be locked in for the child's lifetime. And, of course, the cash value would be growing "tax-free" over that child's lifetime as well.
The fact that the cash value of the policy is not considered at all in federal financial aid formulas is interesting, too, regardless of whether the policy is owned by the child (UGMA) or the parent.
What hasn't really been discussed is what happens if the grandfather only wants to make a one-time $10,000 gift, not locking himself into $100,000 of gifts.
And, of course, given that the intention of the policy is not to get the death benefit but rather to see the cash value grow over a very long period of time, it'd be nice to have seen more details of the actual *expenses* that get taken out of the contributions. Naturally, the brief illustration I saw included none of that. Nor, of course, did it mention that pulling money out of the policy would be tax-free only to the extent that it's either withdrawal of contributions or loans (or, again, the death benefit).
As far as I can tell, the only real upside to this whole thing is that by buying a life insurance policy on a young healthy child, the child will never, to the extent that the policy is enough insurance, worry about qualifying for life insurance. And, if the money's never taken out, will make for a massive capital base to either borrow from or leave income-tax-free to heirs eventually (in, say, 90 years).
But it looks to me like a very poor way to fund college and at best a mediocre way to create long-term savings.
529 still seems a better way for college (especially if in one of the lowest-cost ones run by Vanguard or Fidelity and direct-purchased), or - if the alternative is available - just having grandfather keeps as much money as possible (given RMDs and such) in his own IRA and/or especially Roth IRAs.Anyway, I'd love to hear thoughts on this. Thanks