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  • $2M Whole policy on newborn for college plan?

    So I know, I know, life insurance and stuff.  I didn't really see much written on the main site when I searched for this.  Only one article talking about something small like a $10k insurance on the newborn...nothing this big.

     

    So I'm looking at ways to fund the newborn's college fund.  Whole life is presented to me.

    Mass Mutual $2M policy, 10-pay plan.  Parents would own and benefit from the policy.  That means $20,220 each year for the first 10 years....then no more funding, ever.

    @ age 18, there is enough cash value to allow $85k loans/year for 4 years.  This will almost but not totally drain the policy.  If the kid is a dunce and doesn't go to college, then I (the parents) can draw that cash value for other purposes (wedding, retirement, whatever).

    The policy should stay positive enough to perpetuate forever, just w/ a huge dent due to the $350k+interest loan, along with the death benefit for the second generation.

     

    Have yall ever considered similar?  I can talk and share more about the details and my circumstances if you want.

    Tax-free loan for college, non tracked on FAFSA, large death benefit that will stay with the kid through out his life,

  • #2
    My Thoughts:

    Why do you need a $2 million dollar life insurance policy on a newborn?

    Why "waste" money on an insurance policy you don't need and then need to take out a loan (on your own money) to borrow from it later?

    Why not put the money in a 529? -- all of it goes to the investment (none of it to life insurance, none of it to the life insurance salespersons pockets), you may get a state tax break as well, and it grows tax free if used for anything remotely related to education..

    I'm pretty sure WCI has said more about this at some point as well. (echoing these points and outlining a few more - much more eloquently of course )

    I was pitched a similar policy for my 6 year old... the numbers on it were much more clearly a terrible idea, I ran away from that very quickly!!!

    - Will see what others think!

    Comment


    • #3
      I don't know much about whole life, but doesn't it seem simpler to just put aside this money in a 529? Or taxable account if you are worried about the dunce factor? Seems like a solution for a problem you shouldn't even have. You're a physician, as long as you don't blow it, your kids will be able to go to college without breaking your finances.

      Comment


      • #4




         Whole life is presented to me.

         
        Click to expand...


        Why do you suppose this is?
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

        Comment


        • #5




          So I know, I know, life insurance and stuff.  I didn’t really see much written on the main site when I searched for this.  Only one article talking about something small like a $10k insurance on the newborn…nothing this big.

           

          So I’m looking at ways to fund the newborn’s college fund.  Whole life is presented to me.

          Mass Mutual $2M policy, 10-pay plan.  Parents would own and benefit from the policy.  That means $20,220 each year for the first 10 years….then no more funding, ever.

          @ age 18, there is enough cash value to allow $85k loans/year for 4 years.  This will almost but not totally drain the policy.  If the kid is a dunce and doesn’t go to college, then I (the parents) can draw that cash value for other purposes (wedding, retirement, whatever).

          The policy should stay positive enough to perpetuate forever, just w/ a huge dent due to the $350k+interest loan, along with the death benefit for the second generation.

           

          Have yall ever considered similar?  I can talk and share more about the details and my circumstances if you want.

          Tax-free loan for college, non tracked on FAFSA, large death benefit that will stay with the kid through out his life,
          Click to expand...


          If you can put $20K a year away for college for 10 years, the fact that it doesn't show up on FAFSA is irrelevant. You're not going to get any need-based aid.

          It's a tax-free, but not interest-free loan for college. What do you plan to do with that policy that has all the cash value borrowed out of it after college is complete?

          The main problem here is the rate of return. $20,200 x 10 years at 8% grows to $632K after 20 years. That's a reasonable assumption for a 529 invested aggressively. That's a heck of a college fund. And it all comes out tax-free AND interest-free.

          Now, repeat the problem using the rate of return you expect you'll get in the first 20 years of that whole life policy. I'd expect perhaps 2%. But give yourself 4% if you are really feeling generous.

          $20,200 x 10 years at 2% grows to $270K. Comes out tax-free but NOT interest-free. Geez, that seems like a lot less money, no?

          The answer to my previous question is "Because whole life insurance is sold, not bought."

          Good luck with your decision.
          Helping those who wear the white coat get a fair shake on Wall Street since 2011

          Comment


          • #6
            I really can't believe, after all that has been written on this site, that people still present whole life as an answer to anything except a way to enrich the person selling them the policy. Just the fact that you have to take a loan on the money you already paid would be enough to have me running in the other direction. Think about that, you're having to take a loan on your very own money.

            Hard pass.

            Comment


            • #7
              Excellent feedback....yea, I'm trying to figure out the best approach.  I've been present with Life Ins. policies for myself, wife and kid.  One thing I'm having trouble with is comparing apples to apples.  THE WCI post helps a lot, but curious about other factors.  What about CapGains taxes every year, manage fees, expense ratios, inflation, withdrawing, taxes when distributions happen?  How do yall usually figure this?

              One thing I'm worried about is if I place a lot of the college $$ in a 529-plan, then that money must be used for education...I can't use it for my own retirement if needed, or the child's wedding, or whatever...Plus the FAFSA rules about 529 distributions vs a WL loan to pay tuition.

              WCI's post:
              standard investing:  $20,200 x 10 years at 8% grows to $632K after 20 years.   That’s a reasonable assumption for a 529 invested aggressively. That’s a heck of a college fund. And it all comes out tax-free AND interest-free.

              Whole Life Policy:  $20,200 x 10 years at 2% grows to $270K. Comes out tax-free but NOT interest-free. Geez, that seems like a lot less money, no?

               

              Here's some more details to help the discussion:

              • Married (30 M, 31F).

              • ~$150k income (myself), wife is stay at home mom...I'm an engineer, not a doc

              • newborn baby boy, 6 weeks old

              • Live in Texas.

              • ~$350k savings

              • maxing out TA-accounts each year (HSA, IRA's, 401k)

              • Debt: (I plan on leaving these, paying min.  I like the interest rate arbitrage of investing cash elsewhere rather than paying off low-interest debt)

                • $410k mortgage @ 3.25% (appraised @ $560k)

                • $22K student loans @ 3.00%

                • $28k car loan @ 1.59%

                • $35k HELOC (available) @ 3.74% if needed



              • recent windfall inheritance on wife's side, $700k post-tax $$ in a Trust Account.  She has full control of it.


              -------------------

              So I've been working with an Advisor/broker group out of the Manhattan area.  These guys work with a lot of Wall Street bankers and lawyers types.  They strongly promote the "bank on yourself" philosophy and strongly push Whole Life as a method to do this.  My parents and many of their colleagues use these guys.  They have helped a lot lately with preparing estate plans, legal review, tax help, etc...the total financial support package.

               

              So they are presenting portfolio management @ 0.90% fee assets under management.

              • 80/20 stocks to bonds mix

              • take that portion of low-risk bond portfolio and place into Whole Life insurance (Mass Mutual)

              • $2M, 10-pay policy on new baby ($20200/yr for 10 years)

              • $500k, 10-pay policy on wife ($10000/yr for 10 years)

              • $2.75M term policy on myself (would have been Whole, but I received 'standard' rating due to a driving issue 4 years ago)


              So I like the 'bank on yourself' philosophy, but I also understand that most of this annual premium goes right into the commission of the brokers...but I can take loans against it for any purpose without dealing with applying to a bank and it has Tax Advantages....I'm having trouble comparing the total benefits...Whole life w/ its 'bank on yourself' and tax-advantaged abilities, vs just Buying Term and Investing the Difference (just for myself?  also for the wife?)

               

              I'd love to chat all about this.  

              -Adam

              Comment


              • #8




                Just the fact that you have to take a loan on the money you already paid would be enough to have me running in the other direction. Think about that, you’re having to take a loan on your very own money.

                Hard pass.
                Click to expand...


                I agree....but isn't that the whole concept of banking on yourself?  Rather than saving up $100 in order to then spend $100 and take your account to $0, why not save up $200 and then take a loan for $100 against your account.  The account continues to accrue interest on the $200 principle and you pay back the $100 loan + interest.  Usually there is an arbitrage in the interest rate too.  So if the account has $200 in it earning interest and you loan out $100, you are still earning $$ from the $200+int, especially compared to the first option, a straight withdrawal and draining the account to $0.

                 

                Yea, the WL loan is the same at the end of the day as taking a loan out from the bank or your brother or whomever....just this way you have more control and its easier.  I like this concept rather than save then spend then save then spend.

                Comment


                • #9




                  You are very likely going to find out the hard way that WL is a very bad investment.  Over that period of time, likely paying down the mortgage is going to beat the return of WL and thats including the mortgage deduction.


                  Yea, I'm trying to figure out the 'bad investment' #.  Just compare it to a bond investment @ 3-4%?

                   

                  Also, why do you propose paying down the mortgage?  I've read often that it is better to draw out debt as long as possible, if its low interest % and fixed.  The monthly maybe is locked in, so as the years go by, the monthly payment amount is the same...which means it essentially is decreasing as inflation occurs.  A $100 monthly payment today will be equivalent of much less in 30 years time from now.  Also, the interest rate is low (3.25%).  Why take money that can be invested at 8% to pay of a 3.25% debt?  Drawing it out means a net positive, doesn't it?

                   

                  ...but this is more a discussion about good vs bad debt.  I'd love to focus on large WL policies as investment vehicles.

                  Comment


                  • #10







                    You are very likely going to find out the hard way that WL is a very bad investment.  Over that period of time, likely paying down the mortgage is going to beat the return of WL and thats including the mortgage deduction.


                    Yea, I’m trying to figure out the ‘bad investment’ #.  Just compare it to a bond investment @ 3-4%?

                     

                    Also, why do you propose paying down the mortgage?  I’ve read often that it is better to draw out debt as long as possible, if its low interest % and fixed.  The monthly maybe is locked in, so as the years go by, the monthly payment amount is the same…which means it essentially is decreasing as inflation occurs.  A $100 monthly payment today will be equivalent of much less in 30 years time from now.  Also, the interest rate is low (3.25%).  Why take money that can be invested at 8% to pay of a 3.25% debt?  Drawing it out means a net positive, doesn’t it?

                     

                    …but this is more a discussion about good vs bad debt.  I’d love to focus on large WL policies as investment vehicles.
                    Click to expand...


                    WL policies are terrible investment vehicles.

                    Next question?

                    Now here's a question from me: why the heck do you need a $2.75M term policy when your income is only $150k? Why do you need almost 20x income in term insurance?

                    You are being eaten alive by a bunch of sales(wo)men. Get the heck out of Dodge while you still can.

                    Comment


                    • #11







                      You are very likely going to find out the hard way that WL is a very bad investment.  Over that period of time, likely paying down the mortgage is going to beat the return of WL and thats including the mortgage deduction.


                      Yea, I’m trying to figure out the ‘bad investment’ #.  Just compare it to a bond investment @ 3-4%?

                       

                      Also, why do you propose paying down the mortgage?  I’ve read often that it is better to draw out debt as long as possible, if its low interest % and fixed.  The monthly maybe is locked in, so as the years go by, the monthly payment amount is the same…which means it essentially is decreasing as inflation occurs.  A $100 monthly payment today will be equivalent of much less in 30 years time from now.  Also, the interest rate is low (3.25%).  Why take money that can be invested at 8% to pay of a 3.25% debt?  Drawing it out means a net positive, doesn’t it?

                       

                      …but this is more a discussion about good vs bad debt.  I’d love to focus on large WL policies as investment vehicles.
                      Click to expand...


                      Other professional, what do you do? Having a hard time squaring your comments with the plethora of posts/comments on WL. Maybe you are a craft insurance salesman? Otherwise, you've just listened to a salesmans pitch and have taken their arguments to heart and are trying to find alternatives which is poor reasoning. You need to start from a neutral state and find the best use of the money for its intended purpose. This keeps one from being biased as much as possible, and will almost never end up on WL as the vehicle.

                      As you likely know, the reason its "suggested" and you're given these bogus reasons other things arent as good is because there are fat commissions to the suggester for WL, and this obviously comes out of your return. They invest this dont they? So all those "drags" they mention exist for them as well, theyre not avoided, but you have wrapped it in an expensive package that further impairs its ability to have any gains.

                      Just look at the multitude of posts with people paying whole life for decades with negative gains. Its disgusting.

                      I agree with banking on yourself. This would start by dumping this company and educating yourself a bit before doing anything permanent.

                      Comment


                      • #12
                        I suggest you find a fee-only advisor for a second opinion. There is no way that a WL policy is the right thing for your situation. Your child, your wife, and yourself don't need WL insurance. I am not sure how this "advisor" sleeps at night making recommendations like this one. You are young, planning ahead, trying to do the right thing, and just had a nice financial windfall. Before this guy leads you down the wrong path, pay a fee only financial advisor to give you a more reasonable plan if you don't already believe the folks on this message board. Heck, you could even hire a fee only advisor on an hourly basis to give you financial plan if you don't want to pay ongoing for advice. Make sure the second opinion is "fee-only" not "fee-based."

                         

                        congrats on on the new baby too!

                        Comment


                        • #13




                          Other professional, what do you do?
                          Click to expand...


                          I'm a semiconductor engineer.

                          Comment


                          • #14







                            Other professional, what do you do?
                            Click to expand…


                            I’m a semiconductor engineer.
                            Click to expand...


                            Cool, I am convinced since your handle is probably short for Austin, TX engineer. You dont want this policy, almost any other solution is better. If this company is making the rounds where you work warn your colleagues.

                            Comment


                            • #15
                              Whole Life Insurance is a horrible idea for you and your family.  Don't get taken advantage of.  Hire a Financial planner who isn't selling you anything, read some reputable financial planning books, post this same post in other financial planning sites (bogleheads, etc.).  So far the score is 1(WCI) - 1(PersonwhosellsWL).  Make it a best of 7 series and go with the winner.  Odds are you won't have a Game 6.

                              Comment

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