By Dr. James M. Dahle, WCI Founder
These future scholars won't be getting no full ride from Daddy Warbucks.
Student loans are becoming an ever-larger burden on many households. Medical school loans are ridiculous, especially when viewed in light of many concerning trends in physician reimbursement. Non-physicians are also encountering life-altering levels of student loan debt burden. I had a discussion with a friend recently whose student loan burden prevents him from qualifying to buy a house, even though his income combined with hyper-frugal living is sufficient to make the payments. Many of those who graduated about the same time I did have large burdens, but they were able to consolidate them at 1-2% interest rates, and are not in any huge rush to pay them off. More recent graduates are in an entirely different situation, and even bankruptcy promises no relief. Some consider the IBR program, but for most people, IBR payments are less than the interest, and thus it can be a very risky long-term solution (if your income goes up so do those IBR payments on a now much larger principal).
Balancing Self-Reliance and Debt
I don't want my children to be saddled with student loans into their 30s, 40s, and even 50s that will prevent their financial success. But I also don't want them to think I'm Daddy Warbucks and never really learn to work and be self-reliant. I'm constantly reminding them that when they turn 18 they're out the door and will be responsible for themselves. Who are we trying to kid though? I'm certainly willing to use my assets and income to help launch them into life on a path of personal, financial, and professional success. There is little that is more important to me than that. As Warren Buffett famously remarked, “I want them to get enough that they feel they can do anything, but not so much that they could do nothing.” I can't say my parents paid for none of my eight years of schooling, but the total amount (not counting flights home) was less than I can make in a single shift in the ED. My undergraduate tuition was paid by an academic scholarship, my room and board was paid by my summer and school-year employment (and one tiny student loan with exceptionally good terms), and I learned how to pinch a penny like you wouldn't believe. The Air Force paid for medical school and threw in a few memorable experiences to boot (note that memorable doesn't necessarily mean positive.) There's nothing like spending the Summer walking behind a lawn mower to motivate you to study hard in the Fall.
The Most Important Factor
I know another undergraduate student whose relatively well-to-do parents and other family members were willing to help him out with school. He figured out how much help he could get, and then because it was a sizable amount, opted for a smaller (although no more prestigious) private school over much cheaper options. I hope to teach my children that they should be even more frugal when spending someone else's money than they are spending their own. The most important step one can take to “pay for” college is to choose an inexpensive college. Talking your kid into going to the local state university at $5K a year (and even perhaps living at home while doing so) versus going out of state to a $50K per year private university may be the best college savings decision you ever make. Now, I'm not going to pretend the education at Yale and the one at my local state university is one and the same. It isn't. Perhaps it is worth paying 10 times as much to attend one of a dozen high-end universities in this country. But there are plenty of schools that charge 10 times as much and don't provide anywhere near 10 times the value. My alma mater and the local state universities are still a fantastic value at $5-7K per year. Some people even advocate attending the local community college for the first couple of years. That's $3K per year in my town.
How My Children Will Pay for Their College
Notice how I didn't title this post “How I Will Pay….” I want my children to take ownership of their own education and the cost of that education. There will be assistance from me, no doubt, but there won't be any blank checks. Costs will be paid out of these sources:
#1 Their Merit Scholarships
I chose my alma mater partly because it was the only one of the 7 schools I applied to and got accepted to that offered me a full-tuition scholarship. Working hard in high school and applying for scholarships can be very rewarding. Like attending a cheaper school, the best way to pay for college is to not pay at all.
#2 Their In-School Earnings
Their mother and I both worked as undergraduates. We didn't work full-time, but we have a firm belief that adults are supposed to work. Living in mom's basement playing 16 hours a day of video games isn't an option. If you're 18, you need to have a job, even if you're in school. Working for money helps you to value that money (especially when you're trading your time for money at minimum wage.)
#3 Their Summer Earnings
The lion's share of my undergraduate living expenses were paid for by my summer jobs. Aside from residency, the hardest and longest hours I've ever worked were during the summers of my undergraduate years. I knew I could work 80 hour weeks because I'd done it before.
#4 Their 529 Accounts
I put money into 529 accounts for them each year and invest it aggressively. But it isn't that much money. Utah gives me a tax break on $3680 per year, so that's what I put in there. There will probably be enough to cover tuition plus a little more at the local universities, but that's it. It certainly won't be enough for a full ride, especially at an expensive private university, and you can forget about professional school.
#5 Family Educational Trust
My children will be blessed to receive some money that was put away for them three generations previously. Like the 529s, it won't be enough to provide a full ride anywhere, but it's far better than high-interest student loans. I hope that being recipients of that money will endow them with a desire to “pay it forward.”
#6 My Current Earnings
I expect to have the house paid off about the time the kids go to college. Those mortgage payments can then be redirected toward college expenses. I also plan to have the ability to retire early and be financially free, but knowing me, I probably couldn't handle a full retirement starting in my early 50s and will probably work, at least part-time, throughout my 50s. It seems a little silly to make huge lifestyle sacrifices now to save for something that I could just “cash-flow” later. [Update: That mortgage was paid off in 2017.]
#7 Their Student Loans
I assure you that I won't be borrowing money to pay for their education. However, I can think of some situations where they might have to. If they decide not to take my advice and they attend some expensive private university, they're probably going to end up with some loans. It is also highly unlikely that I'll be able to foot the entire bill for years of professional school. Even in these circumstances, however, I hope to keep their loans down to a level where they can be paid off rapidly upon graduation rather than handicapping their financial futures.
Only the Very Wealthy (and Fools) Try to Pay Everything Up Front
I meet some parents who want to be able to pay for their children's graduate and undergraduate educations solely through 529 savings. They also often want them to go to really great schools. So they run the numbers like this:
Harvard's Undergraduate Total Cost of Attendance for 2013 is $56,407. Harvard Medical School Total Cost of Attendance for 2013 is $78,975. The total is $541,528. Educational costs have been going up at about 6% a year. Let's say the kid is 3 when I get out of residency, so that leaves me 15 years until he starts. $541,528 growing at 6% works out to about $1.3M. In order for me to get $1.3 Million in 15 years, earning 8% a year, I'd have to put away about $44K per year.
That's a ton of money, you say, and you'd be right. But wait, that's just for ONE kid. What if you have 2, or 3, or even more? On a typical physician income of $200K, saving $44K a year is not doable, much less $132K a year. You just cannot save adequately for retirement and save sufficiently to pay for an expensive education for your children on typical physician salaries of $200-400K. Something has got to give. More likely, education will have to be paid for from a variety of resources, as outlined above. The more expensive the education, the more resources you'll need to call upon.
What do you think? How will your children pay for college? Comment below!
Another great piece. My father paid for most of my undergraduate degree thankfully. The Army and federal loans paid for my medical degree
My father had a rule: You must go to a state school unless you get a scholarship.
I always thought that was a good rule but I would take it a little further now and say you must attend a state school unless the tuition prices after scholarship are close to equal.
School prices have gone way up. My alma mater (TCU) was one of the best buys in America when I went there (for a private school) and my scholarship covered 1/2 the tuition making it about the same cost as a state school. Current costs at TCU are estimated at $48,000 a year (w/ room and board). That is about 120% more than they were when I went there 15 years ago. Even with a 1/2 tuition scholarship, a year at TCU would still cost as much as 2 to 2 1/2 years at any Texas state school.
I put away $1200-1500 a year for each kid. It probably isn’t enough but its what I have. I expect them to work for the rest much like you did. I found at TCU that most of my friends never worked (at all) before leaving college. Meanwhile I worekd 20-25 hours a week. My father expected that I earn any money needed outside of the cost of college (gas, food, phone, insurance, etc…) I think my friends lack of jobs left them ill prepared and is probably why I am the most successful.
Great write-up. I agree with Beau’s plan, I plan to pay the equivalent of a state school. We’ve also told our son (only have one child) that if he gets a free ride, he’ll get half of what we set aside for him as a graduation gift.
GA’s 529 gives us a tax break on $2,000/yr. That’s what we put away for him in that account, but we save in a taxable account too. At first, that was our account to retire pre-59 1/2, but I doubt I’ll retire early, assuming I still enjoy my work then.
My parents paid for my education (UGA was pretty cheap 20 yrs ago) and I paid for my entertainment costs. My wife had a partial scholarship and some loans, which I helped pay off after we were married. I’d love for my son to start life after school without debt. We’ll see how much I still want that if he goes out of state to a private school without a scholarship.
Wonderful piece – and it’s spot on. I paid all of my education costs, which had an incredibly motivating effect to be focused and goal oriented. Unfortunately, I didn’t do the same for my kids – in todays world, the summer job capable of paying one year of school expenses doesn’t seem to exist. So my ‘bargain with the devil’ was to pay for my kids schooling as long as they were applying themselves and getting great grades. In hindsight, a mistake. They have all performed well, but not ‘focused’ – they need skin in the game for that to happen. A better option – cost sharing. Having a student loan hanging over their heads would have been invaluable. As it stands now, I may have to sell the other kidney, to see this mob through!
When I was an undergrad, it was my responsibility to pay for the semester of school. If I did well, my parents reimbursed me. If I did poorly, they did not. (Thankfully, that was only my first semester!) As a previous commentor wrote, I had “skin” in the game, because it was my own money to lose. As long as I did well, I really only needed to earn enough for 1 semester worth of payment (since the cycle would repeat itself.)
Great post – I anticipate doing for my kids what my parents did for me, which was basically the equivalent of in state tuition for 4 years of undergrad. If they want to take more time than that, or go to a more expensive school, or grad school/med school, it’s on them. Worked out well for me, finishing undergrad debt free and just like WCI, the AF paid for medical school. One of my sons (or both of them for 2 years each) will be able to benefit from the post-9/11 GI bill transfer, as well.
I’m not sure what we’ll do when it’s time for our kids to start college, but this post is thought-provoking. I went to a non-Ivy private school (my siblings went Ivy), and I can honestly say we are not any better off career-wise than our peers. My husband went public school from soup to nuts and he’s doing well in his field.
I guess it depends on what their career aspirations are, but there’s no question that some private schools carry a mystique that is appealing to certain employers. We’ve been putting away $6000/yr/child so far. We want to avoid handing them a silver platter though.
My undergrad was 50% paid by my parents, 30% scholarships, and 20% paid by me. I took out a loan which I paid for 2 yrs after I graduated. Grad school was paid for by my employer.
My 3 kids are following a similar game plan – and there is simply no way to avoid borrowing money. There is our retirement savings that need to occur at the same time.
While the kids will do the borrowing, dad is co-signing the loans to get more favorable terms. My daughter has plans for med-school so the expected income should pan out. But something tells me most of those payments will be mine to make.
My parents paid everything for the first two years of undergrad at a very low priced but quality university. I was not motivated to get scholarships because they had always told me they would pay for my undergraduate education. I started working summers by year three and paid for most of the rest or undergrad myself because I felt bad taking it from my parents who needed the money. Also got a sholarship later on.
A classmate of mine worked very hard and was motivated to get good grades/scholarships from day one. Her parents had a system where they would match dollar for dollar any scholarship she received and any wages earned by part time jobs while in college. That is all she got. She would actually send them her pay stubs as proof and get a check in the mail. It seemed to work very well. I think I will plan to do this with my kids, maybe helping them a little more on the side toward the end if they really need it and are trying hard.
Some states have wonderful scholarships for public universities. HOPE scholarship in GA pays full ride at public universities to any students making a certain GPA. When I went through it was 3.0 or better but this has increased over the years. Fortunately my parents were able to save all of my allotted undergraduate assistance for medical school. I then went to a pubic/state medical school limiting this tuition requirement as well. Now that I am nearing the end of residency it is nice to not be in desperate need of loan repayment as a job requirement. 529s are great but state paid tuition is even better.
We finished paying off our student loans (100K combined) as fast as possible. Then we took the same monthly amount and put it into 529’s for the 3 kids. We didn’t use it to increase our lifestyle. Do not underestimate compounding. Even with the recession we never ate into out principal. The older two reached college age with enough to pay for 1/2 private school tuition with us cash flowing the rest. But since they each want med school we sat down and discussed if we used the 529 for college our help in med school would be a lot less. They opted for state universities on scholarship. We hope to have enough to get them late into med school before having to discuss loans. They work summers as lifeguards for spending money. They are not required to work during college as their majors are hard and keeping grades up for scholarships is more important. Although the amount of money to save seems daunting, with a plan of saving and cash flowing it is doable. My husband had a health scare (subarachnoid hemorrhage) this year from which he happily fully recovered. But it was a comfort knowing even if we had to limit the cash flowing part of their school, the 529’s were there. As far as should we be paying as much as we do, I think it depends on values and priorities. The kids are hard working and very appreciative of the assistance.
As a two-physician couple in this day and age, how did you impart those values on your kids (working hard, appreciation for your assistance)? My kids are still very young, but I worry they’ll think they don’t need to work hard.
When our loans were paid off, I went to part time and then even took time off. So most of our savings were on a one physician income not considered in the high range of recent posts. A health scare early in our residencies really changed our focus, priorities, and long term trajectory. So we always stressed to the kids the importance of family. They grew up understanding money is a tool not a goal. We discussed financial choices and ramifications with them as age appropriate. Our 12 year old routinely hears about Einstein’s quote about compounding interest. They didn’t always have the newest thing but then neither did we. I think leading by example and allowing them to take responsibility for their actions helped. They worked summers starting at 16. We told them if they put 15% of their income into a Roth we would match them. It is a small amount but teaches them to save and invest.
Suffice it to say that my wife and I have a somewhat different perspective that you do on the relative value of paying for our kid’s education. Not a huge difference, mind you, but I would put us more on the “write a blank check for education” end of the spectrum. (In truth, I wonder if minor philosophical differences will even matter in a few years, given the disturbing trends in tuition increases, fewer resources for scholarships, worsening terms for lending for educational loans, etc. We’re probably all in the same boat, regardless…)
That being said, how do you feel about contributing to the 529 beyond the amount needed to get the tax break? I’ve read some of your other articles (very helpful!), but I just wonder if you have any perspective on how you would recommend maxing out saving for college, if you were so inclined. Thanks!
I couldn’t, in good conscience, approve of my child amassing $400,000+ in debt for ANY education especially medical school. I partially funded my private undergrad (great education at a prestigious school) and paid entirely for my state medical school. After 5 years of residency (forbearance and compounding interest of undergrad AND med school), I had close to $90k in debt. That was not hard to pay off on what I was making 17 years ago. Today’s education costs of medicine are as pernicious as the restructuring of health care. It is sad to see the exploitation of the dreamy young adult who “wants to be a doctor”. A recent scenario: two residents get married. They each have $300,000+ in outstanding student loans for a combined family indebtedness of $600,000+. 2 years out they start a family…3 kids later, one parent wants to stay home to raise kids. Now 1 income and $500,000+ in debt. This is a true story. These debt loads are changing how we live our lives. And, more importantly, you better not stop liking the profession because there aren’t a lot of jobs out there to pay off this debt, and you better not aspire for primary care
As a current medical student (MS2), this article (and the comments that follow) has been an interesting read. I’m getting married next year, so I’m trying to bone up on my financial planning knowledge–so I enjoy this website. In regards to the article, my educational costs have been totally covered by my parents, for which I am very, very greatful. Seeing and hearing all the talk about student loans coming from my med school is mind-boggling. It’s a lot of money when it’s all said and done. I went to a quality state school for undergrad (academic scholarship covered all tuition costs, parents covered housing/books/food, etc.) and am going to a public state (quality) medical school (parents). I have a 529, but the majority of costs are being covered through cash flow. I tend to agree with the Buffett quote. I think the main reason my parents are paying for my education is because their parents paid for theirs (and my grandparents weren’t wealthy people). It keeps my mind at peace knowing that my fiance and I will be saddled with ZERO debt once we’re married (her parents paid for her pharmacy school). This will allow us to begin saving and investing right away–which will hopefully give us a leg up when it comes to paying for OUR kids’ schooling. It’s hard to say now (not knowing our income, circumstances, number of kids, cost of education, etc.), but I want to be able to pay for as much of my children’s education as I can. I feel that it is only right to pay it forward.
So, bottom line is that you can still provide for your children without them turning out COMPLETELY spoiled :). I know how fortunate and blessed I am, and I hope to impart good values on my family in the future.
Thanks for your great input. Let your parents read this post someday!
Here is an article about a government mortgage program your friends could use,
and after the article link is a link to the government website for those loans.
“Rural housing” is not always rural. Some of it is 10 minutes from Austin or Ann Arbor, etc. There is a zero percent down, and although in one place the webpage says it only covers the price of the property/house, in another place it says it will cover some improvements and repairs. Credit record is less important than normal, as long as you have a qualifying current income to debt ratio.
Article:
http://www.bankrate.com/finance/mortgages/zero-down-mortgages-endure-in-rural-areas.aspx
Government website
http://www.rurdev.usda.gov/HSF-About_Guaranteed_Loans.html
Whose friends?
I recently graduated from a good (top 30) private liberal arts college (expensive). I was accepted to my local state school and given a nice scholarship, but ultimately chose to attend my alma matter because of the opportunities it afforded me. I believe WCI addressed this issue in the original post, but I wanted to bring it up in a more contextualized example. I think that while the “quality” of education between the private and public institutions may not be that different, there are a number of unique opportunities afforded to attending certain schools over others–and these have a value that should not be ignored. This is especially true for a student like myself pursuing a competitive graduate program such as medical school.
Holding educational performance and the enjoyment of the experience constant between the two, attending the smaller private school allowed me to become close with professors, to participate in NCAA athletics in Division III, and to serve as a leader for several student organizations. I believe these activities significantly contributed to my acceptance into medical school. Call it what you will, but the extra $$ paid out for education can sometimes have these intangible “returns” if utilized well. I was unbelievably fortunate that my parents worked hard to pay for my school (although I did work during the summers, there was no way I could earn even close to a semester’s worth of tuition/expenses), and they made less than the average single-earner physician. I am now on my own for medical school expenses, however, which looks to be about $200K for four years at 6.8% interest starting the moment I borrow the money. And that’s at my state school. Talk about a different world from 20–or even 10–years ago.
The ultimate point I’m trying to make here is that teaching your children to value money and their education is absolutely important, but limiting a child’s choice to a state school or the cheapest school on the basis of principle seems to run counter to the point of paying for their education in the first place: an investment in their future. It’s pretty hard to calculate an ROI on that.
One difficulty with arguing about this is that those who went to an expensive school never went to a cheap school, and those who went to a cheap school never went to an expensive one. So each is arguing from their own perspective, without ever really being able to understand the other point of view.
All that said, if you had gotten into med school either way, would you rather have gone to a cheaper school and still had $100K to put toward med school, or have gone the route you did and now be facing $200K+ in loans at 5.4% (good news, it’s lower this year than last?) And what if your parents hadn’t made such a significant contribution? How would it feel to be looking at $200K in med school debt on top of another $100K or more in undergraduate debt? There are doctors now who can’t refinance their student loans because their debt to income ratio is too high, just from student loans!
That is an excellent point about hindsight 20/20, and one I had not fully considered (and great news about the drop in interest rate!). Your argument applies equally well to the flip side: going to a more expensive, smaller school is no guarantee of successful future endeavors; there is significant “risk” involved in that either way. Also, I must confess that I am an only child, and therefore my educational expense burden to my parents was significantly reduced compared to a family with more children.
I think that my original thought was geared towards parents with the means/generosity choosing whether or not to pay for their child’s education in either scenario. The other thing that makes this decision difficult, however, is the comparison of a easily-gauged value ($100K in your example above) versus the relatively “invaluable” experiences in which I had the opportunity to participate. Were the years I spent in those activities worth $25K per year? That, certainly, will depend on who you ask. As you’ve said in a few places on your website, money is a tool to be used for what makes you happy, within reason, not the end goal.
I, too, came from the background of public education. I went to a quality public middle and high school, and enjoyed the experience very much. I also enjoy your blog and aspire to have as much financial knowledge and discipline as do you and many of your readers. Keep up the great work!
I was in a similar position to Andrew 15 years ago (we’re dragging the kids to our reunion in a few weeks). Coming from a middle class family the late 90s I found that the cost to my parents didn’t differ much whether I went to Rice or Harvard, but Harvard expected me to take out double loans. I opted for a top five liberal arts college with relatively low loans. The teaching was phenomenal and I enjoyed the same types of opportunities Andrew mentioned. My brother opted for a state school and my parents paid him the difference in the costs of his education and mine. Did I have opportunities he didn’t? Absolutely. Did he do just fine? Sure. To WCI’s point, I don’t think he would change his choice and there is no way I would trade my experience for a check for $40k.
In 12-15 years when my kids are going to college I doubt they will qualify for much need-based aid. If they work hard enough to get into a top private school I can’t imagine denying them given how much I treasure my undergrad experience. On the other hand, I have no interest in paying that level of money for a second or third tier private school. For professional school it seems insane to go the private route if you have a public option. I met my wife in college and she attended a public law school for less than $30k total. She did the same summer internships and got the same jobs as private students who paid well over $30k for each year of law school.
I definitely support the notion of having your kids understand the economic trade-offs associated with the decisions they make. I suspect for most people those values and attitudes were formed before they started college. Parents have to decide for themselves how much they want to steer their childrens’ college choices, but however you do it I suspect that teaching them to be responsible about money is a more significant legacy than the specifics of their postgraduate education.
Could you comment on the addition of the current GI bill to that? Since it can be transferred to your child…(and my husband and I are both active duty and we have transferred our GI bill benefits to each of our two children)
The GI bill is awesome. If you’re eligible, use it!
I consider the way I did it, joining the Air Force, growing up, GI Bill, community college, state college, medical school to be admirable, but in practice not really realistic. Beyond that, I wouldn’t wish the overall experience- essentially living like a cockroach for 8 years of undergrad on my children. Unless something has changed, though, military service does make the kid independent of the parent in terms of financial aid for undergraduate, but somehow not medical school.
On the other hand, it’s a bit frightening to consider saving $500/mo/child X3 for 15 years isn’t quite enough to cover undergraduate costs, much less graduate degrees.
I think folks should be careful about thinking, “having skin in the game” and taking on debt is going to make much difference. 90K in med school debt did nothing for me except absorb my first pretax 140K to pay off. I think maturity, and valuing education have the biggest impact on performance. While an undergraduate at Trenton State College, NJ, I tutored dozens of students in organic chemistry. Most of them premeds, most of them struggled… why? They were busy trying to, “find themselves”. My point? Encourage a gap year or two and allow your kid to find himself without blowing his GPA first semester.
Great posts on the 529 here – I’m curious if a 529 plan isn’t used for the child, can it be held to “roll forward” for a grandchild? Talk about compound interest! Alternatively maybe I’ll want to take some college courses in semi-retirement – or pick up a JD? LOL!
My situation: oldest of 3 starting college this fall – she got all-tuition at an out of state school – wasn’t her first choice but she understood the benefit of graduating with no debt rather than going to Syracuse and having to borrow $$$ – we’ve told the kids that they get coverage up to the most-expensive in-state school in Ohio (according to About.com) x 4 years – out of state or private school premium is on them. Son #2 may also get scholarship money – smarter but lazier – we’ll see how his ACT scores go. In that case we may be able to cash flow room and board and just roll their 529’s forward to the youngest – jury still out for her on scholarship options….
It is illuminating that Ohio closed their “guaranteed” option about 12 or so years ago – I was only able to get in a few thousand on a resident salary; I plan to make that the last $$$ I take out for child #3 to maximize its value. Even the “professional” investors don’t want to commit to keeping up with in-state college inflation.
We’ve always done the Ohio max ($2000/child) for tax savings, but no more – we’ve told our kids that saving for our own retirement is the best gift we can give them!
For others sending off their 1st child – did you bother with FAFSA? We did both FAFSA and CSS (far more painful) and it was completely pointless – my wife and I had close to $400k and the expected family contribution was listed at over $100k – insanity.
Yes, the beneficiary of a 529 can be changed from your child to your grandchild.
I agree with most of what you’ve written, except for the use of the 529 plan. I believe an indexed universal life (IUL) insurance plan would not only provide more money for college from much smaller payments, it would provide a wealth of continuing benefits that would last the lifetime of your child. Yes, I’ve read your articles that bash whole life and I probably agree with 80% of what you’ve written and, yes, I’m a licensed agent that sells IUL’s, so you can discount my opinion by whatever factor you like. IUL’s have many advantages over both whole life insurance and 529 college savings plans and I will try to keep this response as factual as possible.
The numbers give IUL’s a wide advantage. 529’s provide tax benefits up front that go away if the money is used for anything else, and you access the money by withdrawing it, which means nothing is left afterward. You’re done. If you need life insurance, you’ll have to pay premiums for it for 30+ years.
With an IUL purchased and properly set up at birth, or soon after, just $100 a month for 18 years (a total of $21,600) in after-tax payments can provide $10,000 a year for four years of college (tax-free using policy loans that are either interest-free using a standard “wash loan”, or provide a negative interest charge using a variable rate loan that offers the opportunity to earn more on the collateral than is charged for the loan, AKA arbitrage). PLUS, the cash value continues to grow without any additional payments after those first 18 years and can provide another tax-free $50,000 disbursement around age 35, another one of $250,000 around age 55, then annual distributions of over $200,000 per year for life beginning at age 67, all tax-fre. In addition to all this, your kid will never need to buy an outside life insurance policy because the death benefit in this case grows from about $115,000 at issue to over $1.6 million by age 66 and continues to grows until death. Please note that ALL expected expenses have been deducted from these numbers, which came direct from an illustration using software provided by a carrier rated A+.
What’s the catch? There are two. One, for the child to qualify, at least one parent or grandparent must also have an IUL with the issuing company. Two, the indexed growth of the cash value will be tied to the growth in the selected index. Let’s use the S&P 500, which has grown at a real rate (without dividends) of 8.39% over the last 30 years (the average rate of growth is closer to 10%, but includes negative numbers which distort the average). In IUL’s the growth has a guaranteed floor of 0%, and adds interest equal to the rate of growth of the index, if any, up to a cap rate. If the cap rate is 14.5% and the S&P 500 grows 10%, you get 10% added to your cash value. If the growth is 20%, you only get 14.5%. But if the index goes down, you get zero. You can never lose money due to the market. So, if the market performs close to the historic averages, then the numbers I’ve given above are pretty accurate. If the market doesn’t do as well, then neither will the IUL. But if the market in general is doing poorly, how will the investments in your 529, or any other part of the market, be doing? And, yes, the interest percentage is only applied to the cash value after expenses, but isn’t that also the case of most securities investments?
One interesting things about IUL’s is that the expenses become a lower % of the cash value over time as the cash value grows. That’s not the case with money in a 529 or 401k. If a 401k has gross expenses of just 1% and a balance of $100k, then the expenses are $1,000. But the same percentage applied a balance of $400k is $4,000. Say what you will about whole life (which I don’t actually sell), the expense rate in an IUL, as a percentage of the cash value, goes DOWN over time.
How can a baby IUL do all this? One, because the cost of insurance for an infant is so small that almost all of the premium goes toward the cash value, leading to a fast buildup of the cash value. Two, because of the time element. Having this money working throughout a child’s lifetime leads to massive growth over time.
I disagree that using a permanent life insurance policy to pay for college is a good idea. I doubt I’ll convince you. But I want to make sure WCI readers don’t get the impression that I think this is a good idea.
While investing “just $100 a month” for 18 years to get a benefit of $40,000 sounds awesome, if you run the numbers (and bear in mind these are your projected numbers, not the guaranteed numbers which I’m confident are far lower) it reflects a rate of return of about 6.4% per year. I mean, I guess that’s exciting to people who sell insurance for a living, but it’s not very exciting to someone whose daughter’s 529 has had an IRR for the last 8 years of about 9% a year (yes, that includes the 2008 meltdown.) I’m not saying there’s no value in the IUL after you use it to pay for college, but that’s a pretty steep price to pay for that value. If I invested $100 a month at 9% for 18 years, I could have $13K per year for school and not have to worry about taxes, interest, taking loans, or worrying an insurance agent may be taking advantage of me. Seems like an attractive trade off for me.
With an IUL you might not lose money due to the market, but you can (and will, at least in the first few years) lose money due to the insurance, the company providing it, and the agent selling it. I’ve discussed all this elsewhere in my posts on IUL.
I’m not sure why you think 1% expenses in a 401(k) is a low figure. I view it as a very high figure. Expenses on a low-cost 529, IRA, 401(k) etc are ridiculously small compared to those in any insurance policy and have a very long way to rise before ever becoming close. I’m sure you’re very talented at selling these policies as a college savings tool though. A lot of people wouldn’t see through the arguments you’re making. However, I’ve addressed this all in my series on Myths of Whole Life Insurance previously. The only advantage of an IUL over WL is that you have the possibility of a higher IRR if the market does well (and of course, the possibility of a lower one if the market does poorly.)
You want to use it for your own college savings? Knock yourself out. It’s a free country. There are many roads to Dublin. But I think it’s a lousy idea that is used primarily by insurance agents to sell more insurance.
Thank you for your response. I love a good debate. First of all, you made an incorrect assumption. I said the IUL would provide $10,000 a year for four years of college, but I didn’t say that was the total yield. Admittedly, it’s not much higher, though. There ARE expenses in the early years that cause the initial balance to be low. However, it’s a mistake to compare IUL’s and whole life. They are as different as elephants and alligators. The numbers I used are based on the 30 year performance of the S&P 500 and there is no guarantee the next 30 years will be the same. They could be the same, be less, or even be better. But we can also say that about the IRR of your daughter’s 529. There’s no guarantee it will continue to yield 9%, right? Nor can we guarantee that most people have your ability to choose an investment that yields that much with such low expenses. Most people can’t. With an IUL, the clients don’t need to be stock market gurus. I show them the historic averages and they choose one, which can be easily tracked in most newspapers or the internet. At the end of year one in my illustration the cash value is $941 after premiums of $1,200. My commission in this deal, since you’re so afraid of it, is the massive sum of $290 which, as you can see, is NOT deducted from the premiums.
While 9% per year sounds great; what’s she going to have after she’s spent the money? As I said in my first post, nothing. Are you saying it’s too much trouble to take out a tax-free loan at zero interest and have the $40K still there after she graduates? How much will she have to invest to get all the other tax-free benefits that follow – $50,000 for a big wedding or downpayment, $250,000 to pay off her condo later, $200,000 a year for life from age 67? Not to mention a lifetime of life insurance with no premium payments? ALL of these benefits come with ZERO additional out of pocket expenses. Not only that, but if she ever develops (I’m sorry to even think it) a chronic or terminal illness, she’ll be able to access the death benefit to help with the expenses. She can access her cash value with loans at any age and for any reason without taxes or penalties. Do these tax-free benefits REALLY not stack up? I mean, just do the math for the retirement years – which are $230,000 per year tax-free for life from age 67. How much would your daughter need to invest after graduation in a qualified plan to get that much after-tax income during those years?
I freely grant that IUL’s are not for serious investing. However, in 2014, the living benefits of IUL’s offer features that most people can use. It may not be right for an investment guru. But for many others, it’s an easier and safer way to secure some pretty nice benefits.
I disagree that IUL and WL are dramatically different. But that’s all semantics/perspective. No point in arguing about it.
I disagree that it somehow requires me to be a stock market guru to have achieved those 9% returns. I put half into the Vanguard Total Stock Market Fund half into the Vanguard Total International Stock Market Fund. I just bought all the stocks in the world and forgot about it. Not exactly guru-esque. Investing doesn’t have to be complicated and saving for college doesn’t require using a complicated financial product like IUL.
You say the $290 isn’t deducted from the premiums, as if that somehow means it doesn’t come from the client. Are you suggesting that the client does not indirectly pay your commission? I mean, basically the client pays $1200 and is left with $941 and you get $290. It doesn’t take a genius to see that $941+$290 more or less = $1200. And that presumably includes the investment return.
The interest isn’t zero. It might be a wash loan in whatever magical policy you’re discussing (since every one of these is different it’s nice to mention which one you’re discussing and send an illustration) but it isn’t zero.
The tax-free benefits you are so fond of aren’t free. They cost real money for the insurance company to offer. Insurance companies are not charities. They are charging what they consider a fair price for those benefits. If those are benefits that I do not need (and I don’t) then I don’t need to waste my money paying for them. For example, the wedding fund for that daughter is doing even better, 13% over the last 7 years. Of course, I started that one in October 2008, so perhaps not a very fair comparison.
For everything you can use IUL for, there is a better way to do it. It’s interesting that you can use a financial product in lots of different ways, but everyone one of them becomes an angle used by salesmen to sell more of them. It’s better to start at the beginning with your goal. For example, I want to give my daughter as much as I can toward college, but I only want to save $5,000 a year for the next 18 years for that goal. Is it more likely that she will have more money if I invest it in stocks in a 529, or if I use it to buy insurance on her? The data I have seen suggests it is more likely she will have more money if I invest it in stocks due to their higher return. So that is what I am doing. Even better, it’s even MORE TAX-FREE than buying insurance. Not only are all the earnings tax (and interest) free when I pull them out, but I get a state tax credit for making the contribution in the first place. So let’s move on to another goal. Let’s say, for some bizarre reason, that I want a death benefit on my daughter for the next 50 years. What is the best way to get that? Well, it’s probably to buy an annually renewable term policy, or perhaps buy a 30 year level term policy now and buy a 20 year level term 30 years from now. It’s very cheap, not complex, easy to price, and a very competitive market. No permanent policy needed.
The best financial products don’t require a sales job to get people to buy them. Complexity does not favor the purchaser.
[Ad hominem attack deleted.] IUL’s are great financial tools and are VASTLY SUPERIOR for saving money for a child’s college education, not because they produce the maximum return for college (which seems to be all you care about), but because they produce a good return PLUS millions of dollars in additional benefits at no additional cost and with no risk to the cash value!
You act as if every American with a 401K or IRA is earning double figures on their investments and paying less than 1% in total costs and fees. Well you might want to pick up a newspaper sometime because it’s not so! I work with public schoolteachers on a regular basis and many of them are putting money in 403b’s or TSA’s in the equivalent of passbook savings accounts, earning .10%-.25% because they are afraid of the market. Most of the others are putting money into mutual funds that are netting less than 5%. I’ve met several couples recently that paid thousands of dollars to registered advisors and are just now getting back to even after the crash of 2008. How dare you rail against all insurance agents, as if every one is exactly alike! Do you believe all investment advisors have the exact same skills and concerns and that ALL RIA make money for their clients? GIVE ME A BREAK!
TV shows like “60 Minutes” and others, not to mention just about every newspaper and magazine in America have run articles in recent years about how people with qualified plans have been getting KILLED in fees, many of them being charged 4-5% or more. The securities industry had to be dragged kicking and screaming into reporting even SOME of the fees that are charged on 401k’s two years ago.
[Ad hominem attack deleted]
And these people aren’t even building a tax-free retirement income, they’re building a tax problem (not only will their distributions be taxable, it’s going to make most of their Social Security income taxable)!
I said the tax-free benefits of an IUL were tax-free and they are tax-free. My clients NEVER pay income taxes on the growth in their accounts, on the loans they take, or on the death benefit. What else does tax-free mean? If you want to talk about estate taxes, that’s a different story that applies to very few people.
And wash loans mean the interest charged on the loan is EXACTLY the same as the amount of interest charged on the loan. It’s guaranteed in the contract! But that’s not even the best kind of loan.
[Ad hominem attack deleted.]
As for where the commissions come from, they come from a separate account at the carrier. THEY DO NOT COME FROM MY CLIENT’S MONEY. EVER! I said that it’s true there are expenses in addition to the cost of insurance in the first year, but the commission isn’t one of them. But who cares? I agree there are costs and fees deducted from the premiums paid into an IUL. There are also fees coming out of just about every kind of investment in America. What’s important is what comes out at the end.
It’s great if you’re getting 13% on your wedding fund. I hope you are! You’re building a bigger fund, but when it’s gone, it’s gone. But, she’ll actually get to spend more money over her lifetime if the money had been invested into an IUL (even WITH the state tax credit), AND she wouldn’t pay a penny for the life insurance after leaving for college. And if you think 50 years of term insurance is cheap, you’ve never seen a rate card! Term starts out cheap, but the premiums skyrocket at age 60, if not before (even for women!). And that’s if she stays healthy. Insurance companies love to sell term insurance because they know that they rarely have to pay off on them. They get abandoned when the prices start taking off, causing the former policyholder to die without life insurance. Maybe you think that’s ok, but there are lots of people that don’t. But here’s something you’re not mentioning – if your daughter wants grants (free money!) instead of loans (and I assume she does), the money in her 529 will count against her when she completes her FAFSA. But the money in an IUL would not!
[Ad hominem attack deleted.]
I understand that if you just want to build a cash fund over a specific period of time, then there are better ways to do it than an IUL. But if you want to actually SPEND the most money, you NEED an IUL!
[Ad hominem attack deleted (against my daughter? Really? Pretty classy.)]
[Ad hominem attack deleted.] And when you delete this thread from your site, as I expect you will, you’ll be able to find it on my website.
So weird that this conversation has gone this direction. This never happens, except every other time a life insurance salesman has stopped by to correct “misinformation,” or every time I’ve met with one etc etc.
The solution to people being in bad investment products is to get them out of bad investment products, not put them into an insurance product. The solution to people being afraid of the market is education, not keeping them out of the market.
I love how you think any of my children are going to be eligible for need-based grant money. I assure you that will not be the case, whether I put money in a 529 or not. Have you worked through a FAFSA for an average physician?
I don’t see why you need to write 1000 word comments on my site when you have your own. I have no need to delete your post, but as is typical with conversations like these, I will delete the ad hominem attacks.
[Irrelevant comment about my child deleted (as will any further comments about my children)] Encourage your readers to weigh in. I’d love to know what they think.
I’m a reader; here’s what I think:
Every consumer advocate I’ve ever come across says insurance policies on children are a rip-off. Maybe you are one of the rare honest, helpful people in a marketplace full of predators. If so, good for you and keep up the good work helping those teachers. My advice to you as a good guy, however, is to drop the argument that your commissions don’t come from clients. It is so preposterous that it makes you appear dishonest and makes anyone with a brain skeptical of all of your other arguments.
If any of WCI’s readers are actually considering this (though I doubt they are) let me point out a huge difference between the IUL and the 529 strategies: You said a parent or grandparent needs an IUL from the issuing company that the child would use. It seems like making a fair comparison between the two requires factoring in the costs of the adult’s IUL. It’s probably not worth WCI’s time to run the numbers, but I’m sure the cost-adjusted returns of the two IUL’s would be crushed by a 529 and the adult’s premium money going into an efficient taxable account (or piled into the 529, or whatever).
OK. Let’s discuss what you’ve written. You start off with “Every consumer advocate I’ve ever come across says insurance policies on children are a rip-off.” Assuming that “every consumer advocate” says that, do you understand WHY they said that? Please tell me.
As for commissions not coming from my client’s accounts, allow me to define what I’m saying by using an annuity. If my client needs an annuity of, say, $100,000 and I put him into a Midland National Life Capstone 10 or 14 annuity, I will earn a commission of 3%, but his account will open with a balance on day one of $110,000 because this product provides a 10% immediate bonus to the principal paid (it pays this bonus on all premiums paid in the first seven years). So, was the commission paid from his account? I say no. Commissions are an expense of the company, just like electricity. For this particular company, which does not sell direct to the public, it’s a marketing expense. The money is not deducted from the client’s account balance; therefore, the client does not pay my commissions. You can argue that all clients pay the commissions indirectly, but to what purpose would you make that argument? For the client, the question is – How much will I earn for my deposit after expenses are deducted from my account? That is the basis for my statement.
Yes, I said that for the infant to qualify for an IUL, at least one parent or grandparent must have an IUL with the company; and I am using the Midland National Life XL-CV4 IUL for the example, which was the source of the numbers in the posts above. Last week, I was sent an illustration by a friend that shows even higher accumulations with a product from Minnesota Life, but I’m not as familiar with that one.
For building a college fund with an IUL, I said that $100 a month from the birth of a baby boy, paid just through age 18, would (assuming average performance of the S&P 500 and AFTER all costs and expenses) provide $10,000 a year tax-free for four years of college. I also agreed that WCI would build a larger pool and have greater distributions if his Vanguard Fund earns 9% through the same 18 years (he says it would provide distributions of $13,000 per year and I won’t argue, even though the 15 year yield of that fund is much lower. It looks like he deleted the note I posted about the 15 year returns of the two funds he’s using.) But I did confirm that his fees are very small, something like 17 to 23 basis points. I will agree that it’s possible to earn a higher yield at a lower cost with a 529.
[Editor’s note: The comment referenced in this paragraph was certainly NOT deleted. Only ad hominem attacks and irrelevant comments have been deleted from this commenter’s posts. There may have been a delay in posting his comment while I went climbing instead of sitting at home on the computer arguing with insurance agents.]
But here’s where the IUL shines. First, in a down market, the Funds in the 529 are going to go down. There are no guarantees with the kinds of securities that go into 529’s, are there? The cash value in an IUL can NEVER go down because of the market. The IUL has a guaranteed floor of zero%. Second, after the money in the 529 has been used on college expenses (that’s ALL they can be used for, right?), the student will have nothing left or will have to lose the tax benefits on money used for anything else. Any money left in the IUL can be accessed at any time, for any reason, without penalties or income taxes. But this is just the start of the payouts from the IUL!
Since the distributions from the IUL are loans and not withdrawals, all of the money taken out is still in the cash value and growing, even without future out-of-pocket premium payments. This student will have life insurance throughout his lifetime without any more premium payments and the tax-free death benefit will grow from $115,000 at issue to over $1.6 Million by age 66 (it grows much larger later). How much will it cost the 529 student to purchase the same coverage? Even if the student doesn’t want that much coverage, he’s going to make payments that the IUL student did not have to make. (I will deal with the ramifications of taking out loans near the bottom.)
PLUS, the growing balance in the cash value will allow additional tax-free loans to be taken out at various “life events”, if needed. Buying a house or condo, paying for a wedding, taking the vacation of a lifetime, paying OFF the condo, supplementing any other retirement income. Money for this can also be taken at any age without taxes or penalties. In the exampe I provided above, I mentioned a $50,000 distribution at age 35, a $250,000 distribution at age 55, and annual distributions for life from age 67 of $230,000 a year. In addition, if this student ever comes down with a terminal or chronic illness, he will probably be able to access the death benefit to pay for the additional expenses. For the student with the 529, he’s got to pay all these things out of pocket, or commit a substantial amount of capital into investments. The student with the IUL gets all this as a bonus because his dad was smart enough to buck the crowd. Isn’t this a good enough reason to consider an IUL over a 529? I’ll add the required IUL for the parent in a moment.
Now, I’ve explained the good side of using loans instead of making withdrawals. It allows the cash value to grow even while money is being spent (it’s a little like having a line of credit against the appreciating value of your home; spending the borrowed money doesn’t make the value of your home go down, does it? But with an IUL, the appreciation rate is guaranteed to never be less than zero). What’s the downside? What about interest and payments? Policy loans in an IUL never have a payment schedule. If you prefer, you never need to make a payment while you’re alive. Outstanding policy loans when you die are deducted from the death benefit. They ARE charged interest to make sure they legally qualify as loans and to maintain the tax-free benefit.
As for the interest, policy loans can be taken as early as the first year with two options, a standard loan or a variable loan. With the standard loan, the collateral cash value is set aside in a separate account and earns a fixed rate that is slightly lower than the fixed rate charged for the loan. So, you might be charged 6% interest for the loan, but the collateral earns 5.75%, a net charge of .25%. After year five in this IUL, the interest earned and charged is guaranteed to be the same, what is called a “wash loan.” This is essentially a zero interest loan. Let me ask you, if you could borrow money at zero percent and earn a higher rate somewhere else, how much would you borrow? I’m pretty sure your answer would be “as much as I can!”
A wash loan is good, but a variable rate loan is potentially much better because of the use of arbitrage. Variable rate loans are charged a rate equal to 4% or the Moody’s Corporate Bond Yield Average up to a cap of 6%. The current rate is 4%. But in this case, the collateral cash value stays in the indexed account, earning a yield equal to the growth in the index used up to the cap rate, which is 14.5% in this policy, and I normally use the S&P 500. So variable policy loans will be charged 4-6%, but never higher. As a result, every year the growth in the S&P 500 is greater than the interest charged, you earn a profit on the loan balance. If the interest charged is 4% and the market goes up 12%, you earned 8% on your loan balance, which is better than a wash loan. You only pay interest if the index used earns a lower rate than the interest charged. Again, I ask, if you could borrow money at 4-6% and invest it anywhere you choose, how much would you borrow?
That’s everything I can tell you about an IUL for the student and the sections about policy loans and growth tied to an index will also apply to an IUL for the parent. If the parent is 35 years old when his child is born and he would not only like to qualify his child for the IUL, but wants to provide a death benefit to protect his family, and would also like to build a tax-free retirement income to supplement his qualified plan, here’s what I can do for him with $200 a month to age 65 (a total investment of $72,000). After all expected expenses have been deducted, he will be able to take tax-free distributions for life from age 66 of almost $36,000 a year. If the parent lives to age 90, he will have received distributions of $899,841 without having to pay any income taxes, and his death benefit will have risen from $88,247 at issue to $329,841 at age 65, and is still $385,814 at age 90 after all policy loans have been deducted.
If you total all the CASH benefits that accrue from investing $21,600 in the child IUL, plus the $72,000 in the parent’s IUL, I believe the total amount of tax-free money received greatly exceeds the amount you would receive by using a 529 and other investments in securities EVEN when the securites have a higher annual yield and lower cost basis. If you believe differently, then please show me your math. I’ve written this not to sell you anything (I’m in California and can only deal with clients in this state), but to try to help you understand that the crowd thinking on this is probably not right in most cases.
I disagree that IUL is a good college funding tool. I wrote a bit about this subject here:
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance-part-2/
as myth #9. Although IUL is a little different from WL, most of the reasoning translates just fine.
If you wish to fund your children’s college using it, knock yourself out. But I suspect that most docs will be better off in a good 529, especially if there is a state tax credit/deduction for the contribution.
A few comments about the half-truths you wrote in the tome above:
1) A business’s customers pay all the expenses of the business plus the profits. Commissions are an expense of the business. Therefore, the customers pay the commissions. Anything suggesting otherwise is simply obscuring those facts. In investing, you get what you don’t pay for.
2) The cash value in an IUL may never go down (assuming the insurance company can stand behind it’s contract) but that is very different from saying the customer didn’t lose money. I had a doc who wrote a comment this week about $310K he put into an IUL before he realized it was a mistake. He lost a great deal of that money. Returns are negative for 6-15 years, a remarkably similar period of time to the amount of time over which most parents save for college.
3) The numbers you throw out as examples of what can be borrowed out for weddings or for retirement spending are projected, not guaranteed. The guaranteed numbers look terrible. It would be more honest to put significant qualifiers on those statements or at least mention the assumptions that go into them.
4) Borrowing money at 6% to invest seems pretty foolish to me.
5) The large numbers you throw out assume many decades of compound interest at a certain rate, and so seem impressive. When returns are calculated and compared with appropriate investments, they don’t look nearly so hot. Classic sales techniques. “Just $200 a month” provides “$36,000 per year” – small number up front, large number on the back side. Why not use the infamous “just $6 a day?”
6) 529s don’t require blood draws, urine tests, or pesky questions about rock climbing. The more expensive you are to insure, the lower your returns on insurance-based investing products.
7) There is great wisdom in crowds. If people were getting rich off IUL left and right, the insurance companies wouldn’t have to pay such large commissions to sell these suckers. It just doesn’t pass the sniff test.
Again, if you think the upsides of IUL (and there are some) outweigh the downsides (and you understand them thoroughly) then buy it for a retirement or college savings vehicle or whatever. I don’t. I know that insurance isn’t free so I insure only against financial catastrophes and don’t mix insurance and investments. My approach made me a millionaire only a few years out of training. Seems like a good one to me. If you want to try something else, feel free. There are many roads to Dublin.
I just checked the two Vanguard funds you’re using on Morningstar and the 15 year returns are 5.34% and 4.87%
[Ad hominem attack deleted.]
I started those 529s much less than 15 years ago, thus my better returns.
Yes, you mentioned that about your returns when you wrote it. The returns on my IUL for the last 5 years are 9.1%, but I never use that for projections. A good stock market generally floats all boats. I DO use a number that is based on a 30 year history. As a matter of fact, my products offer a dozen different indexes and we show the 5-10-15-20-25-and 30 year returns and we let the client choose which one to use. I’m not sure why that particular post keeps changing locations and why you’ve now deleted more of what I’ve written. There were no personal attacks in most of what you’ve deleted.
But let’s take a look at your post from earlier this evening, 8/24, and what you claim are half-truths in my posts.
1. What’s your point?
2. The cash value in an IUL can NEVER go down because of a drop in the market. Period. Point me to the reader that says he lost money in an IUL and I’ll respond. It’s not possible that he put money ($300,000) in an IUL and lost it; he probably put it in a Variable Life policy, which is a security that offers the possibility of loss. I don’t sell variable policies. The returns within an IUL depend on a number of things and the way the policy is designed WILL affect it. For the purpose of this article about how your kids will pay for college, I specifically gave you the numbers from an IUL built to maximize cash growth and minimize the amount of life insurance and expenses. Do you know what happens when you choose a level death benefit instead of an increasing death benefit? Do you know if you can change this selection? Do you know any of the other factors that will influence the growth of cash value in an IUL? Do you know how any of these will affect the commissions paid? Your statement that “returns are negative for 6-15 years” is given without any supporting facts or figures or explanation. It’s not true. The IUL I recommend for college savings is given to parents of young children, preferably less than two years old, to provide plenty of time to build the cash value. In the first post I made here I said that I was talking about when an IUL is properly set up at birth. This is not for 12 year olds. I never implied anything different. I’m talking specifically about an 18 year window, which I think makes the 15 year returns on your Vanguard Funds relevant.
3. Do you actually know when and how the guaranteed returns in an IUL might come into play? What triggers them? What they actually represent?
4. Really? (ignoring the fact that the policy actually pays the 6% for you or gives you an arbitrage opportunity to earn a profit on the borrowed funds?) How about if you were given the chance to buy a foreclosed house from the lender for $50,000 and you know the repair cost is about $25,000, and the after-repair value will be $150,000, and you don’t have the $50K liquid? You wouldn’t want to borrow money at zero percent to take advantage of this?
5. Again, what’s your point? The way to build a large retirement income is to invest as long as possible, get a market rate, and avoid losses along the way. When you add tax advantages and compound interest, you have a winner, don’t you? You write “when returns are calculated and compared with appropriate investments,” where’s your numbers? Mine are up above. I asked you or any other reader who disagrees with what I’ve written to show me their math. It’s very easy to slander me just because you disagree or don’t understand. Here’s a simple example. Show me what a typical doctor with his own practice might do with $1,000 a month from age 30 to age 65. How much AFTER-tax income will he produce? Assume he wants to provide for income to age 95. Tell us where he will put the money and what kind of return he will expect during both the growth period and the drawdown period. However, maximizing the after-tax income is the goal. Show me what you’ve got!
6. The baby IUL I’m talking about requires no medical exam for the baby. It just has to be born healthy.
7. “There is great wisdom in crowds.” I could give you so many examples of situations where following the crowd was a bad idea, but it’s not worth it. I will say this. Cash value life insurance was the original tax advantaged place to put money. Universal life insurance was created in the late 1970’s specifically to give rich people a place to grow their cash without income taxes, back when the marginal tax rate was over 70%. Walt Disney, of all people, used policy loans against his life insurance to complete the first Disneyland when banks wouldn’t lend to him. The biggest users of IUL’s are rich people because of the flexibility and tax advantages.
[Ad hominem attack deleted.]
I hope you will spent a little more time investigating the facts of what I’ve said and less time repeating the myths.
Believe it or not, insurance agents are not the target audience of this website. So I’m going to make a strategic decision to spend my time this afternoon writing something for doctors instead of replying to your repetition of the same arguments.
As I’ve said before, if you love IUL and want to pay for your children’s college with it, knock yourself out. I think it’s a bad idea. My interpretation of the evidence supports that conclusion. If you, or the rare reader who arrives at this point in the comment stream (which requires at least an hour’s read) disagrees, you (he) may go get himself a sweet IUL. No skin off my nose.
You had me nodding along in agreement but then you lost me when you said you can’t save 44k/yr on a $200,000 income and then said you can’t save for retirement and save for college on a $400,000 per year income. I realize you said “expensive education” but that’s semantics. You certainly can do both if you don’t buy the doctor’s new car and the doctor’s big house and try to keep up with all the other shiny things doctor’s want to compete over. Several other folks have responded how they paid off their student loans as quickly as possible and didn’t let lifestyle inflation creep into their financial plans.
I think you’re generalizing comments that were made to be more specific. What I was saying is you can’t save $44K for college for one kid on an income of $200K. And you certainly can’t do it for multiple kids.
$132K for college on an income of $400K is still a huge deal.
The overall point is that you can have anything you want, but not everything.