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Life insurance vs. 529 plan

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
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Plain Bread alone for e-mail, thanks.  The rest gets trashed.
Reply to
BreadWithSpam
I agree. On this board, I'm convinced there are specific reasons for one to fund permanent insurance. The above story you tell doesn't seem to pass my common sense test. Invest $100K over 10 years and then borrow all the cash out to pay for college? And as you said, the grandfather never spoke about $100K just $10K. This sounds like all the stereotypes of bad salesmen. When you sell hammers, you are trained to view every problem as though it were a nail. It wouldn't surprise me if the seller would offer the VUL to anyone who had any money saved for any purpose. Call me paranoid, but I've watched enough detective shows to advise that no one should be worth more dead than alive. When friends ask me to share how much insurance I have, I tell them it's enough to put our daughter through college, but not enough for my wife to quit working. You have a great observation, Roth deposits could be great for this purpose, no tax at all, and flexible if the kid doesn't go to college.
Reply to
JoeTaxpayer
[snip]
A kindergarten kid with an estate plan. Novel. The implied rate of return and continuity of life of the sponsoring institution would be key.
Reply to
dapperdobbs
On Thu, 26 May 2011 19:41:12 CST, dapperdobbs wrote:
Over the years "wonderful" applications of life insurance ultimately have disappointed me to the point where I ignore them. In that regard it is like the use of variable annuities as an investment.
Where life insurance can be useful is as a risk management tool (risk of premature death). Beyond that I don't even debate it anymore. I just tell clients who wish to "review" the latest reincarnation of life insurance that I pass and suggest they do likewise. Been there, done that.
Reply to
HW \"Skip\" Weldon
By the time the kid has reached retirement age, quite a few nasty things could take place. The USA could be hopelessly in debt, as a lot of people are predicting nowadays. The banks and insurance companies could all be bankrupt. The USA could have entered another big, serious war, and, unlike previous big wars, could have lost. There could have been two or three financial meltdowns and maybe a great (or greater than ever) depression or two. The whole financial and tax structure could have been overhauled to the extent that present-day investments don't mean much. Democracy could be gone, and there could be a dictatorship in Washington. An asteroid could have hit the earth, and half of humanity could be gone. Space aliens may have taken over. The oceans may have risen and wiped out all the coastal cities. Our region of the MIlky Way could be sucked into a Black Hole.
The probability of ALL or MOST of those things happening is extremely small. However, the probability of AT LEAST ONE of the above happening is not negligible. Planning that far ahead into the future, despite the attractiveness of whatever financial product is considered, is a huge risk.
Reply to
Don

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