IUL Vs. 529 - Opinions?

Dang, I'll agree, one helluva thread.

So here's a scenario: Grandma & Grandpa want to set up Sally (7 yrs) and Bobby (10 yrs) for college. After being shown their options, they choose to take out Whole Life policies for both kids' college. You set it up at 60/40 premium/PUA. Questions:

1. Who owns the policy?

2. Who are the beneficiaries?

3. What company takes children on a whole life plan, or is this written on someone else?

4. I assume dividends are accessed first, right? Then what are the tax ramifications after that?

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The 60/40 is an approximate blend and will vary depending on the WL plan you use. The grandparents could own the policies or they could just pay the premium and the parents could be the owner. The parents would be my choice as insureds because they would likely still be insurable and also want the death benefit. Any company that offers WL will insure children, but I wouldn't use the children as insureds as they probably wouldn't be able to qualify for as much face amount as would be required to be able to accumulate any meaningful money.

I prefer loans to dividend surrenders because with loans I can put the money back in the contract but I can't "unsurrender" a dividend. Using my garage analogy, surrendering dividends is like driving out of the garage and then boarding up the garage door so that I can't get the car back into the garage. Besides, there's no major diiference in the interest I pay on a policy loan versus the gain I forego by surrendering the dividend additions.

But again, I rarely have a college funding conversation in a vacuum by itself. Also, before spending assets, I would make sure they new how to complete the FAFSA, see what their chosen school has in scholarships, and also Stafford loans, etc.
 
Interesting. If you place the insurance on the parents (or grandparents), I understand the death benefit value, but do you explain the impact of the cost of insurance to the client?

On the child, it could be fairly minimal, but on a grandparent, it could be substantial.

Do you do a comparison of what a $100 or $200 a month contribution to either the premium of a life policy vs a 529 plan and what it looks like 10 years from now?

Dan
 
Interesting. If you place the insurance on the parents (or grandparents), I understand the death benefit value, but do you explain the impact of the cost of insurance to the client?

On the child, it could be fairly minimal, but on a grandparent, it could be substantial.

Do you do a comparison of what a $100 or $200 a month contribution to either the premium of a life policy vs a 529 plan and what it looks like 10 years from now?

Dan
Yes, I talk about the mortality cost, but when you're funding right up to the MEC limit, the COI is somewhat mitigated.

I don't do a numbers comparison between the two options since I have no idea what a 529 might yield. There are people who started 529's in 2000 that assumed 8 to 12 percent. In reality, they have earned a slightly negative rate of return... for an entire decade. These two options are really apples and oranges.
 
Originally Posted by Mac1958
2. Who are the beneficiaries?
The owner. Forgot the name of the triangle, but insured, owner and beneficiary cannot all be different.

Goodman



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But I haven't seen the best point made. Larry was on it.

If you fund the 529 the basic notion is that college comes, and you spend all the money and it's gone.

But those of us who like PLI (especially WL) know that there are ways to use that money without actually loosing the ability to leverage that money to continue to collected the interest (or shall we say dividends) that we would be giving up if we just spent the money.

Ultimately, PLI whomps the 529 in it's ability to be used and leveraged as a wealth building tool.

...or you could just blow the money when johnny and suzie go to school and throw away all of those years of sacrifice...your choice.
 
We must not be doing it the same way. I use a 60/40 split of base premium to PUA Rider. So, at the end of the first year my guy has enough cash value to cover 4 to 5 months of premium through APL (automatic premium loan). At the end of the 2nd year he has almost a whole year of APL ability. So, a WL doesn't just lapse if a premium is missed... at least not the way I do it. I could get greedy and use a near-MEC PU@65 with all base premiums and it works almost the same.

If my guy runs into a cash flow hardship, he can cut his premiums by up to 40% (PUA rider) and keep his base contract. That's pretty flexible.


No, we are doing it the same way. Thats why I made the statement of:
Yes, I realize that a max funded WL will have some flexibility in premiums if need be, but not nearly as much as a UL.

The UL can skip a year completely... or even two if need be (depending on what year you are in/performance etc).
Maybe thats splitting hairs with the 40% of planned contributions; but like I said, most college savers are doing it on top of a lot of other monthly obligations, and its the first to go when income ceases.

Also, if they plan to use the PI as a savings vehicle in the future, the GPT option available with UL will usually allow for greater distributions in later years.
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But a bigger issue for me is that I don't talk to clients and prospects about using PLI to deposit money into and then at some point in the future we'll blow open the vault door and clear out the money for some special purpose. I'm showing them how to use their PLI as a "garage" for their money (take your money for a drive, put it back when you're done, take it out again, put it back, etc). The real rate of return on the policy isn't the cash value, but ACCESS to the cash value with no strings attached for whatever he needs it for (Disney Story, JC Penney, etc).


I totally agree with this. Not only is it a conversation that incorporates the "overall picture", but the PI option is about leveraging that money and savings vehicle for the future. So its not just about your kids future, but the clients as well.

I just placed a policy that on the midpoint illustration, had the guy paying for at least half of the kids college, and taking a sizeable amount in retirement. This was without paying a dime back into it too; I just looked at him and said "imagine if you pay some of that college loan back over the years.... then I show him those numbers..."

Its part of a larger conversation.
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Let me ask you about EIUL. Does it work like indexed annuities in that you must put the money in the policy and leave it in there for a specified period of time or it doesn't get the index rate but rather a smaller guaranteed rate?


It depends on the crediting method and the company.
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Now to make another point; imo most 529 investors have no business putting $ into a 529 plan at all.

Most all are not paying off credit cards, not fully insured, not maxing retirement accounts (or making sufficient contributions), etc, etc, etc, basically living the american dream.... lol

They stow away $20-$50/month to save for little Johny's college and pray for 20% returns so that the tiny amount they are saving will be somewhere near enough to pay for a real college that he will "hopefully" get in.
Basically its to make themselves feel like they are "doing something" for their child.

So how suitable is the sale of a 529 these days? Especially considering the college attendance rate/drop out rate...?????

Lets phrase it a bit differently:
"Mr. Client, I suggest you put your money in this product that you will have around a 30% chance of incurring a 10% penalty... plus taxes.... "

How many people would buy if it was phrased that way??

At least the PI is multi purpose, and will always be tax free if used correctly. And thats not even beginning to compare the risk factors and fees involved that will affect returns/accessibility.
 
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I totally agree with this. Not only is it a conversation that incorporates the "overall picture", but the PI option is about leveraging that money and savings vehicle for the future. So its not just about your kids future, but the clients as well.

I just placed a policy that on the midpoint illustration, had the guy paying for at least half of the kids college, and taking a sizeable amount in retirement. This was without paying a dime back into it too; I just looked at him and said "imagine if you pay some of that college loan back over the years.... then I show him those numbers..."

Its part of a larger conversation.
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It depends on the crediting method and the company.
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Now to make another point; imo most 529 investors have no business putting $ into a 529 plan at all.

Most all are not paying off credit cards, not fully insured, not maxing retirement accounts (or making sufficient contributions), etc, etc, etc, basically living the american dream.... lol

They stow away $20-$50/month to save for little Johny's college and pray for 20% returns so that the tiny amount they are saving will be somewhere near enough to pay for a real college that he will "hopefully" get in.
Basically its to make themselves feel like they are "doing something" for their child.

So how suitable is the sale of a 529 these days? Especially considering the college attendance rate/drop out rate...?????

Lets phrase it a bit differently:
"Mr. Client, I suggest you put your money in this product that you will have around a 30% chance of incurring a 10% penalty... plus taxes.... "

How many people would buy if it was phrased that way??

At least the PI is multi purpose, and will always be tax free if used correctly. And thats not even beginning to compare the risk factors and fees involved that will affect returns/accessibility.



Excellent!
 
Great, great thread guys and gals...thank you for contributing to it.

I had actually already decided to exit health insurance (what I've done for 6 years now) and specialize in college planning. Last week I created my website...check it out at The College Planning Specialists and tell me what you think. I would appreciate any feedback...thanks!
 
An overfunded life policy that is a MEC when the child is in college is a logical savings alternative to a 529, expecially if the client is risk averse. I don't usually put these in place if the child is over the age of 6 or 7 though. Even the most efficient life policy can't build sufficient cash value in less than 12 years to justify college savings. There are higher interest alternatives for that.
 
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