Are you considering cash value life insurance as a way to save for your child's college education? You might be hearing this suggestion from insurance agents and brokers, but is it truly the best option? Here at Life Insurance Review (LIR), we believe in informed decisions, and that's why we offer a valuable service to help you navigate the complexities of life insurance products.
Beware of deceptive college savings tactics employed by some life insurance agents who are motivated by commissions and sales incentives.
Why a Second Opinion Matters
The truth is, some insurance salespeople might be biased towards promoting cash value life insurance for everything, even college savings. This is because they earn higher commissions on these policies compared to others. However, there are often better options available, and that's where LIR comes in.
529 Plans: More Flexible Than You Think
One common misconception is that 529 plans negatively impact financial aid eligibility. The reality? Only a small portion (around 5.64%) of your 529 balance is counted towards your Expected Family Contribution (EFC). Additionally, withdrawals for qualified education expenses typically aren't considered income. Click on this link to go directly to the IRS website for direct and more complete information about this very topic.
Cash Value Life Insurance: High Costs, Low Returns
Cash value life insurance comes with a hefty price tag. Upfront fees, recurring charges, and internal costs can eat away at your returns for a decade or more before the cash value even starts to grow. When compared to professionally managed investment accounts with average fees around 2%, cash value life insurance often falls short.
Consider Roth IRAs, Roth SEP-IRAs, Roth 401(k)s, and Roth 457(b)s. These accounts offer tax benefits and typically have much lower fees (around 1%) compared to life insurance with fees that can reach 50% or more!
Life Insurance for Your Child: Only When Necessary
Does your child have a pre-existing health condition that necessitates life insurance coverage? If not, prioritize other options first.
Ask the Right Questions: Transparency is Key
We encourage you to ask your life insurance agent or broker these questions:
Do you own a cash value life insurance policy for your own children?
How has its performance compared to the initial projections?
Can you show me a detailed comparison to a 529 plan?
Beware of High-Pressure Sales Tactics
Life insurance agents and brokers are often motivated by commissions and sales incentives. Many lack comprehensive financial planning knowledge or in-depth understanding of taxes and investments.
Here are some red flags to watch out for:
Only holds a life and health insurance license and limited investment experience/knowledge/education/certifications
Doesn't own cash value life insurance themselves, or can't show a long-term performance history for their own policies
Cannot demonstrate how their proposed policy stacks up against other options
Cannot clearly explain the fees and charges of the policy and how it affects the cash value performance when rates, capes and cost of insurance changes each year. And in a whole life policy, it's dividends that changes each year.
Here's an example of an actual recent case we received for client who share these screenshots with us. These illustration pages were posted on social media groups and in private chats, clearly violating California insurance commission rules and being out of compliance in every way:
We frequently encounter misleading presentations that depict cash value life insurance as an standalone investment or a superior alternative to a 529 plan. Agents and brokers must present the entire illustration and clearly explain the assumptions (non-guaranteed figures) they use. While these illustrations may appear promising (but with a lot of missing important information), consider this: even if they are true in reality, what kind of investment takes 10 years just to break even? During those years, any returns in the cash value policy are eroded by costs.
The above is one example of many deceptive college savings tactics life insurance agent and brokers use to sale cash value life insurance.
And to be clear, cash value life insurance has its place and, if designed properly for the right client profile who is in good health, can be an alternative vehicle for cash accumulation. However, more often than not, we see the opposite.
Don't Get Stuck in the "Cash-Value Trap"
Before you commit to a cash value life insurance policy for college savings, get an independent review from LIR. We'll help you understand your options and make an informed decision that truly benefits your child's future.
LIR: Your Trusted Partner for Life Insurance Decisions
Contact LIR today and speak with a qualified professional who can provide unbiased guidance. We'll help you navigate the complexities of life insurance products and find the right solution for your needs.
FAQs About College Savings: Why You Might Need a Second Opinion
1. Is Cash Value Life Insurance Really the Best for College Savings?
Many life insurance agents promote cash value policies for college savings. While they offer some benefits, the high fees and long wait for returns can make them a less attractive option compared to 529 plans or Roth accounts. Consider seeking a fiduciary professional's unbiased review to compare all your options.
2. Are 529 Plans the Only Option for College Savings?
529 plans are great, but they aren't the only solution. Roth IRAs offer tax advantages and flexibility, while regular investment accounts can also be part of your college savings strategy. A fiduciary advisor can help you determine the best mix for your specific needs.
3. Can a Life Insurance Agent Give Me Unbiased College Savings Advice?
Life insurance agents are incentivized to sell policies, which might not always be the best fit for college savings. A fiduciary has a legal obligation to act in your best interest, putting your needs before their own.
4. What are Hidden Fees in Cash Value Life Insurance?
Cash value life insurance can come with upfront fees, recurring charges, and internal costs that reduce your returns. A fiduciary advisor can explain these fees and help you calculate the true cost of a cash value policy.
5. How Can I Get a Second Opinion on My College Savings Plan?
Life Insurance Review (LIR) provides independent reviews of life insurance products and offers comparative options from a wide range of life insurance companies, giving you more choices and better solutions. Our team of fiduciary professionals will analyze your situation and recommend a strategy that maximizes your returns and minimizes fees. Contact us today for a free consultation!
