On 26 Aug 2003 12:40:05 GMT, Gre <gre[at]notmail.com> wrote:


- quote -

Good point. And college financial aid is not the only thing that
changes over time. So too do the income tax rules - which by college
time may impact 529s.

In the end one of the best things might be to forget about all the
tricks and just focus on accumulating as much money as possible.
Towards that end the old standbys of diversity and cost control are
tried and true.


-HW "Skip" Weldon
Columbia, SC

Peter R. wrote:
- quote -

That's misleading because the VUL itself has costs that aren't present
in the 529 plan. Ask him specifically what all of the VUL costs are,
including the costs of the underlying investments.

Also I consider the fact that you'll need to keep a VUL in place for the
rest of your life to be a substantial cost. With the 529 you put money
in, take the money out when your child is 18, 19, 20, and 21, and you're
done with it. All the earnings are tax free because that's the nature of
the beast. No tricks required. With VUL, you borrow in those years so
you can avoid taxes, because distributions are not tax-free by nature.
To maintain the tax-free treatment you'll need to keep the policy in
place for the rest of your life, and of course it eats money every year.
If the policy blows up (you can guard against this, but...) then you set
yourself up for a tax hit, because a portion of the outstanding loans
becomes taxable income at that point.

All things considered you'd need a unique set of circumstances for the
VUL to be preferable. Ask the salesman: "what unique set of
circumstances led you to recommend a VUL for me?" If there's more than a
3-second pause...


- quote -


It's true that a 529 should be used for funds that will be used for
education. On the flip side, when you do the math a 10% penalty on
earnings isn't the end of the world, considering the investments grew
tax-deferred up to that point.


- quote -


I.e., if you don't need financial aid, you won't qualify for financial
aid...yep, that's true.


- quote -


Your VUL investments will be spanked for additional costs above the
costs of a 529 like, say, Nevada's Vanguard-based plan. Verify the exact
amount, you haven't posted anything about costs, but if it's 1% added
cost, then over 18 years you simply end up with a lot more money in the
529, if the underlying investments are the same. Like, over 18 years
$10k grows to an amount 18% bigger at 9% ($47k) than it does at 8%
($40k). So you're already behind at that point. And then with the VUL
you'd need to keep that policy ticking along for the next...we don't
know...5, 10, 25, 40 years? to maintain tax-free status for the
education fund, which would have been tax-free by nature in the 529.

- quote -

Only in special cases really, beginning with a need for life insurance,
and factoring in some special tax concerns. I've found that a lot of
people who don't have much in the way of tax issues are pitched
special-purpose vehicles like VUL.


- quote -


Did I mention costs?

-Tad

parwarp11[at]aol.com (Peter R.), you asked:

<< <I> I have been talking to a financial planner who is suggesting <b> to use a
Variable Universal Life (VUL) inurance policy not only for life
insurance but for an investment vehicle</I> > > to build up money to fund
education for our now 1 yr old daughter. I have also considered the
use of a 529 plan for this purpose.</I> >
This is what variable life policies were designed for. Just how one might use
the "investment vehicle" (the separate accounts) is up to you. But. . . . .one
should be well aware and fully understand that though one can use the
"investment vehicle" in many different ways, the real purpose for cash to be
stored in a permanent policy is fund the policies RESERVES. Reserves are
there to help pay for future losses AND pay future insurance costs as the
policy's mortality rates increase with your age. And so, a certain amount
always has to stay in the policy reserves to keep the policy from lapsing. If
you manage the policy well, it can work well in providing permanent life
insurance protection as well as a source of cash.

<< <I> The planner has stated the following advantages of a VUL over a 529 as
an investment/savings vehicle for future education expenses:

1) The VUL he offers has a 0% interest on the "borrowing" of the cash
value of the policy so there is no cost to accessing the value and
since the cash value is tax free it provides the same advantage as the
529.</I> >
This depends on how you look at "costs." There IS interest charged. What
you're referring to is "net interest cost." That is, the amount of the loan
is charged a certain interest and that same amount earns the SAME rate of
return. Therefore, you net interest cost is 0%. But, there IS some very real
cost to you and that has to do with the lost opportunity cost for the amount
you spend either as a withdrawal or through a policy loan.

The amount the loan amount earns (as that amount is pulled out of the policy
owner's investment accounts and put into a special account to earn a fixed rate
return) can be less than the amount one might earn in their selected investment
accounts.

<< <I> 2) The cash value of the VUL can be accessed for any reason and not
only for education reasons should another more pressing need arise.
The 529 earnings would incur a 10% penalty on top of paying income tax
on the withdrawal.</I> >
Yes, one can access it for ANY reason . . . . and, when using the policy loan
provision, one doesn't have to go through any qualifying process. One can just
call by phone and have the money in a short time. HOWEVER . . . . one can not
get at 100% of the money (remember, there are policy reserve requirements that
need to be maintained).

<< <I> 3) The cash value of the VUL does not count as an asset in financial
aid considerations since it is an insurance policy as the 529 would
count as an asset of the parents.</I> >
True.

<< <I> So based on the above my questions are as follows:

1) Is the above information correct and if so is the VUL a superior
method to a 529 to save for education, why or why not?</I> >
I would argue that it DEPENDS. One can make a good argument one way or the
other depending on a particular set of issues and where one's priorities lie.

<< <I> 2) How about as a general savings vehicle and not just for education?</I>
As far as whether a VUL can work to that end . . .yes, they can. But in order
for them to work effectively, one needs to have a very high risk tolerance and
be somewhat finically sophisticated. These types of policies are NOT for most
people. To use a military term, they are not a "fire and forget" type of
policy. They take regular monitoring (by you and/or your advisor/agent/broker)
to keep them performing well.

<< <I> 3) Any other issues relating to VULs anyone thinks I should be aware
of? </I> >
Just remember, the insurance issues come first. If you have no needs/wants for
the life insurance, then one should simply stop right there.

Keep in mind that VUL's can only work efficiently towards these ends if one is
HIGHLY over funding the contract. Just paying the base/target premium does not
prove to be effective for other uses other than permanent life insurance
coverage.

To keep the tax advantages for the use of policy loans in amounts beyond the
total premiums paid, the policy MUST stay in force until the day the insured
dies.

Peter R. wrote:
- quote -

True, and available from a number of companies. Has he
however discussed with you ALL of the COSTS involved
in a V/U/L????????
0% interest is also available in a U/L policy, which has a
MUCH lower cost.......

- quote -

Again true, up to BASIS. Also available in U/L at lower cost.

- quote -


True, same caveat

- quote -

NO......NO......NO.......
The V/U/L as well as the U/L are both Life Insurance
policies, that provide a DEATH Benefit. IMHO, that
makes them PREFERABLE to the 529, IF you have
a need for Life Insurance.

- quote -

Tax considerations

- quote -

YES...YES...
Cost & Need

Cal Lester CLU
--
I would have written a shorter letter ... if I had the time

This signature file is generated by Pick-a-Tag !
Written by jeroen[at]vanbaarsel.net

I have been talking to a financial planner who is suggesting to use a
Variable Universal Life (VUL) inurance policy not only for life
insurance but for an investment vehicle to build up money to fund
education for our now 1 yr old daughter. I have also considered the
use of a 529 plan for this purpose.

The planner has stated the following advantages of a VUL over a 529 as
an investment/savings vehicle for future education expenses:

1) The VUL he offers has a 0% interest on the "borrowing" of the cash
value of the policy so there is no cost to accessing the value and
since the cash value is tax free it provides the same advantage as the
529.

2) The cash value of the VUL can be accessed for any reason and not
only for education reasons should another more pressing need arise.
The 529 earnings would incur a 10% penalty on top of paying income tax
on the withdrawal.

3) The cash value of the VUL does not count as an asset in financial
aid considerations since it is an insurance policy as the 529 would
count as an asset of the parents.

So based on the above my questions are as follows:

1) Is the above information correct and if so is the VUL a superior
method to a 529 to save for education, why or why not?

2) How about as a general savings vehicle and not just for education?

3) Any other issues relating to VULs anyone thinks I should be aware
of?

Any suggestions/advice would be greatly appreciated.....--PR