KEEPING YOUR FINANCIAL ADVISOR OR INSURANCE AGENT HONEST

Article #1:  Funding your child’s college education:  Scam or Savior ? :  Tax-free policy loans from life insurance policies as a savings or income producing vehicle for your child may not provide enough income.  Read this blog to see the pros and cons.

Pros:  A properly designed life insurance plan can provide a death benefit to provide for college or other expenses as well as a tax-deferred savings vehicle with tax free policy loans. This only works though if the policy is designed with the client’s interest first.

Buyer Beware:   First:  It is illegal for an insurance agent or advisor to refer to a life insurance premium as an investment or a contribution.  It must be designated as a premium,.           Second: An improperly designed life insurance policy that uses a normal premium schedule will pay your agent handsomely but not provide you with enough savings. Using life insurance as an investment vehicle for the sole purpose of paying for your child’s college education may not work unless you pay attention to careful principles outlined below:

How to design your policy properly if at all:

            “Overfund” your policy with cash but follow the IRS Guideline Premium Tests:  In general, a single deposit is the best way to do this since the savings element of the policy has the potential to grow more quickly.  Important , If you exceed the Single Premium guideline premium rules; all policy loans may be taxable; not tax –free.

You can also use a premium schedule of  7 years or even an ongoing guideline level premium . To make sure that your agent is not designing the policy to have a higher commission and consequently; a smaller savings element; ask him to show you on the required computer printout what the single, 7 payment, and guildeline level premiums are. You are best suited to pay the maximum under these guidelines without exceeding them.  They are disclosed on all insurance company  official printouts.           

Allow 15 years or longer for the savings to accumulate:  The policies work on compounded tax-deferred interest. If a child is already 10 years old for example, and enters college at age 18; there would only be 8 years or so before the first loan is taken out.  Therefore there usually would not be enough time to accumulate interest.

Ignore computer projections that are illustrating 10% ;to 12 % returns. Even indexed universal life insurance plans that have some built in safety factors; often over estimate the yearly expected returns.  If an insurance company were to actually deliver these high interest rates routinely; they would have to increase the internal charges for the insurance.  Increasing the insurance costs; reduce your yearly yields.

Plan on keeping the life insurance in force until death.   If the policy is surrendered loans in excess of your cost basis may be partially or completely taxable.

This is important.  You  cannot defer taxes on life insurance , tax income and then cancel an insurance policy without having a potential for taxes to be due.

In summary while most advisors are honest; you should protect yourself  somewhat by working with a broker that will compare several companies for cash values and company financial stability.  Ask also for a “ Vital  Signs” comparative report which shows the different companies financial ratings from 5 different 3^rd party sources. A single A.M. Best report is usually not enough. This article is not meant to given tax or investment advice. Always consult your accountant, attorney,  for more specific advice.