Whole Life Insurance as College Savings

For the last few weeks, we've been talking about savings vehicles for minors.  We've gone over Roth IRAs, 529 College Savings Plans, UTMA accounts, and High Yield Savings Accounts.  If you missed those episodes, you can catch up anytime at luminarywealth.com/resources.

Today is the last video in this series, and I really hope you've enjoyed going on this journey with me, learning about all the ways you can save for the minors in your life, and I hope you picked up a few golden tidbits of information to carry with you as you navigate your financial future.

So today, we'll talk about Endowment Life Insurance plans, like the Gerber Grow Up Plan.  These types of Whole Life Insurance are often dressed up as college savings plans, and while they can help people save for college, there are only a few very specific circumstances where you would want to exercise this particular savings vehicle.  And honestly, in almost every circumstance where someone might want to go this route, the planners here at Luminary would prefer to use a different solution.  One which will save you more in the long run.  We'll talk about that and more in today's episode.

Are you ready?  Let's get started!

An endowment life insurance policy, or a whole life insurance policy, as it's more commonly known, is a life insurance policy that doubles as an investment or a savings account.  It pays a lump sum after a specified number of years or upon death.  For detailed pros and cons, visit my first video in this series, My 5 Favorite Ways to Save for Minors.   You can find that and all the other videos we've done at luminarywealth.com/resources.

Now, for just a minute, let's talk about life insurance in general.  Life insurance is something we talk about a lot in the financial planning industry.  Some people see it as a complete scam, some people see it as a balancing of the risks of driving a car, crossing the street, and going sky diving, and some people see it as a smart way to guarantee that they'll never be destitute if their working spouse passes away suddenly.

And guess what?  They're all right on some level.  There will be a debate about life insurance long after you and I have left this Earth, and companies with a lot of money will be trying to talk you into life insurance for as long as you live.  So I'd like to briefly address what life insurance is for.

What's good about life insurance? 

Well, for starters, insurance is insurance.  It protects you from the unforeseen "what-ifs" of life.  What if I fall and break my leg tomorrow?  What if I get into a car accident on the way home from the grocery store?  What if my house burns down?  Health insurance, car insurance, and homeowners insurance are just 3 examples of insurance policies that we have all accepted as vital and necessary to safeguard ourselves from the unforeseen dangers of living.  Or, you have them because they're required by law.  The only difference with life insurance is that the government doesn't require you to have it.

So who needs life insurance?

Well, it's a bit of a bell curve. When you're a child or young adult, with little to no financial debt, burdens or responsibilities, you don't really need life insurance.  No one will be missing your lost wages if you suddenly passed away.  And similarly, as you near the end of your life, your children are hopefully financially independent enough to not be burdened by your passing.  So the demographic who needs life insurance the most is the sector in the middle - adults with families, incomes, and debt.  Here at Luminary Wealth, we see life insurance as a way to cover the shortfall of an unintended consequence or event.  If you're the breadwinner, you have a spouse, a house, and children, but you don't have enough saved for them to live on if you suddenly pass away, you need a really solid life insurance policy to protect your family from becoming destitute if you died tomorrow.  If you're NOT the breadwinner, but you handle all the childcare, you need life insurance to cover what it will cost your working spouse to pay for childcare in the event that you can't be there to play that vital role in your family.  If your children are nearing college and will be dependent on you to fund their education, insurance to cover the costs of setting them up for a healthy adulthood is a really good idea if you don't have savings to cover their future.  As you age and your children become young adults of their own, your need for huge life insurance policies dwindles until it disappears altogether.

So if you're young, in college, or just out of college, and someone is trying to sell you a life insurance policy, you can politely decline their generous offer.  And likewise, if you're a retiree with very little debt and your kids are grown and have lives of their own, you're in the clear.  But if you're in parenting mode, you better believe a solid life insurance policy is a great idea to cover the shortfalls of your life savings. 

This begs the question, what kind of life insurance do I need?

Getting into the weeds a little bit, there are several different kinds of life insurance, the most popular and well known being Term Life, Whole Life, Universal Life and Variable Life.  We aren't going to go deep into those today, since we're just focusing on the Whole Life option as it relates to saving for college.  Just know that if you're in your parenting years and you don't have life insurance policies on you and your spouse, you really should discuss this with your fee-only financial planner to help you decide which kind is best for you, or if you need it at all.  I caution against going directly to an insurance company for this advice, and I'll tell you why.  Certain policies at certain insurance companies pay certain amounts of commission.  Some more than others.  So when an insurance agent is trying to sell you life insurance, there is a serious conflict of interest based on how much that agent is going to get paid for the type of insurance he or she sells you.  There are also varying types of fees and maintenance associated with certain life insurance policies that make some of these plans absolute highway robbery.  This is why I think discussing your options with a fee-only financial planner is the better choice, because your planner doesn't get any kickbacks for selecting a specific type of policy, so their only objective is to fit you with the best solution for you.

Alright, back to whole life as it relates to college savings.  Some people are just plain terrible about saving money.  If you want to learn more about financial planning and Life Planning, there's a really great book out there called The Seven Stages of Money Maturity, by George Kinder, some even call him the godfather of Life Planning.  He discusses why people have complexes around money.  Why some people spend and spend and spend some more, why some people hoard their money, why some people can't seem to wrap their heads around what healthy spending is, and everything in between.  I highly recommend it if this subject is of interest to you.

So whole life insurance could be a viable option for people who are legitimately poor at saving money, because it’s a forced savings plan.  If you don't pay the premiums, the policy could get cancelled and you lose monetary perks and benefits of the plan.  That 'gun to your wallet' scenario is really effective for some people to get them to save diligently.  Unfortunately, the fees for the cost of whole life insurance, as well as the additional administrative and other maintenance costs associated with a whole life insurance policy are much higher than in a term life policy, and so we don't feel it's a good option to use as a pure savings vehicle.  If it is determined that life insurance is a need, we believe that you would really be better off getting a term life policy to cover your possible shortfall in the case of your death, and invest the difference in a 529 College Savings Plan.  We would recommend this alternative solution in almost every case over using whole life as a college savings vehicle.

Now some do view whole life as a good college savings vehicle because it can pay out a lump sum at a specific date, and working backwards, you can decide how much to put in the account each month to hit a target goal.  But arguably, a 529 College Savings plan offers the same set it and forget it feature, without the extra fees.  Whole Life will also cost your child in college because as soon as your child takes the payout, that's considered income, and it counts against them for financial aid AND taxes. (I don't know if this is true, or if it's considered taking out basis first, then earning, which are taxed -- you might want to check on that). 

In Summary

We've sort of jumped all over the map today, and I know it may feel confusing, so let me sum up:

We feel Whole life is almost never the best option to prepare your family for college costs.  There are much less expensive savings vehicles, which I've talked about for the last month, and I felt it was important to touch on this one because there is a lot of misinformation out there, mostly put out by insurance companies and their sales force, about why and when you need life insurance. 

In contrast, and just as an item of note, Term Life could be a very important option for people with dependent children or spouses, but who have very little in their life savings.  But again, ask a fee only financial planner to fit you with a low-load insurance policy that suits your overall financial goals and circumstances, not necessarily an insurance agent who will be compensated more or less based on which policy you choose.

Over the last 6 weeks, we've discussed a lot of savings options for minors, and the best part about these options is that you don't have to just pick one!  You can arrange a combination of these options so that your children are set up for anything they want to do when they grow up, go away to college, start a career of their own, and explore the incredible number of opportunities the world has to offer.  The best way to help them do this is to save something!  Don't wait until they're in high school.  Start now, today.  Open a high yield savings account, start a 529, talk to them about putting away their earned income into a Roth IRA, ask your parents to contribute to their UTMA account, or talk to your financial planner about life insurance policies that will protect you and your family while you're out there living life to the fullest.

I hope you'll talk about these options when you sit down at the dinner table with your family, because discussing saving with your kids is the best gift you can give them, even if you can never set aside a dime for their future.  Educating the next generation about how to save for retirement, vacations, a house, a car, and giving back to their community is a noble pursuit every parent, grandparent, aunt, uncle, teacher, and lemonade stand consumer should be striving for.  Help today's children understand that saving now is easy, and it's absolutely worth it.

As always, don't hesitate to reach out to me with any questions you might have.  You can email me at Lee@LuminaryWealth.com, or connect with me on LinkedIn or Facebook. 

Keep saving, and have a great day!