The following is the complete transcript of our webinar titled College Saving and Funding with 529 Plans vs High Cash Value Life Insurance. We have incorporated back links into the transcript where appropriate so our readers can dig a little deeper into the concepts and ideas discussed here.
Steven Gibbs: Thank you all for joining us with one of our top high cash value life experts, Denise Boisvert. If you’re joining us for the first time, you may not know me. I’m one of the founders here at insuranceandestates.com and have a background in estate planning law. Denise works a great deal with our high cash value whole life clients. And Denise, do you want to say a little bit about you?
Denise Boisvert: Sure. First of all, I’m really excited to do this webinar on college funding because I think it’s a really big advantage for a lot of people and not taught very much of the opportunities and the options that they have when it comes to college funding.
But I’ve been in the insurance industry for over 19 years. I love doing high cash value life insurance because I just think it’s so beneficial in so many ways for so many people and there’s not a lot of education out there on it. So I love educating people on that. But I have clients all over the United States, very busy with this. This is all I do. So I’m very familiar with the carriers and their products and how they compete with one another.
So I really feel like this webinar is going to help a lot of people, not only with college funding but just opening up their eyes to see how you can use it for a lot of different things.
Steven Gibbs: So kicking out the topic, so permanent life insurance versus 529 plans. So really you’ve done a lot of work, Denise, in the area of helping people utilize this product or this particular vehicle for college saving and funding. So we’re going to dive into these areas.
We want to review the attributes. A lot of people maybe are thinking about a 529 [Plan], so we want to help you guys understand that a little better. If you’re just starting to research what in the world permanent life insurance is all about, and in particular high cash value life insurance, we’ll offer us some feedback on that. That’s one of our primary focuses here at Insurance in the States, and Denise is right in the arena helping folks with that every day.
Various pros and cons of both 529s and high cash value life. And then Denise has a little treat in store here toward the end of our webinar with an actual example of how high cash value whole life can be used for college saving and funding. And Denise, would you say this is an alternative to the mainstream approach?
Denise Boisvert: It’s an alternative and it’s a good alternative.
All right, so first of all, 529 plans are state-run and they’re very similar to a Roth 401K or a Roth IRA, but they’re intended for education and retirement savings. And if you’re not familiar with what a Roth is, it’s after tax money that’s going into an account that can grow tax-free for when you need to use it with obvious basic retirement restrictions attached to that. And a 529 also has restrictions attached to it, but the 529 is usually invested in mutual funds and your earnings will grow tax-deferred.
Steven Gibbs: Just so you know, there’s no guarantees, right?
Denise Boisvert: No.
Steven Gibbs: This is pretty similar to your typical retirement account in that regard.
Denise Boisvert: Correct. Yes. The 529 plans, if they’re in … A lot of people think that mutual funds can’t lose money, but anything in the stock market can lose money. It’s not always a sideways investment. So yeah, so there is that risk of what will you have when you actually want to use, are ready to use your 529 plans. And I have some people that had 529 plans and they’ve put a lot of money in and they don’t have that much, as much as they’ve put in. So that’s another drawback.
The problem with the 529 is the money is gross out tax deferred as long as you use it the way the IRS wants you to use it, which is a qualified education-related expense. Then you’re with withdraws will be tax-free. But if it doesn’t fall into their category of education-related, then it’s taxable. So you’ve kind of thrown it in there probably for not an advantageous result. You’ll get a penalty for early withdrawal.
Steven Gibbs: And maybe we’ll talk about this with pros and cons. Is that if you do use it for qualified education, then you have tax-free withdrawals, which you could argue is better than your traditional IRA.
Denise Boisvert: There is another consideration that you need to make. If you are in the income bracket of being [able] to apply for financial aid, 529 plans can actually hurt you. Because you’re putting money away into a 529 plan and they’re taking that money and they’re saying, “Okay, that money you have, so we’re not going to add that to your financial aid package because you already have it.” Whereas had you never saved it, you may have gotten that money in financial aid. If that makes sense?
Steven Gibbs: Yeah, that’s a teaser to one of the advantages that you’re going to bring up down the road here. So those are some overview characteristics of 529s, very similar to the traditional retirement account with some advantage for qualified education.
So here, Denise, what are we looking at?
Denise Boisvert: So here we’re looking at permanent life insurance, and this is really attractive for college funding for a variety of reasons. Just like a 529 plan, the growth is tax-deferred. I have to say tax-deferred, but it’s actually tax-free if you take it out as a loan. But I want to be politically correct in saying that it’s tax-deferred and will most likely be tax-free, like I said, when you withdraw it, as long as you withdraw it through policy loans.
A 529 plan, the growth is not guaranteed and it’s not protected from market downturns. But the permanent life insurance is not invested in the market. It really has no connection to market fluctuation because basically it’s guaranteed interest with dividends that are paid by the insurance company based on their mortality and claim rate. It’s not based on stock market. It just makes it a really safe investment.
Whole life insurance is probably the safest permanent life insurance [out] there. But one of the advantages of using a whole life policy for college is the flexibility and the diversification. If something happens to one of the parents. Maybe they’ve become disabled or even an unexpected death, you have the death benefit of that permanent life insurance to help your child stay in college because now you’ve got a big sum that you would not have had with a 529 plan.
So that’s just a safety net. And I’ve just found over the years that most of my clients are more apt to [save] money [for] college in a permanent life [policy] because they have the comfort of knowing that if something unexpected happens, they have access to those funds. Whereas a 529 plan, you don’t.
Steven Gibbs: You’re getting guaranteed growth, plus you have the tax-free advantages, and then you’re also getting additional flexibility.
Denise Boisvert: Yes. And one major advantage over a traditional 529 plan is that if your child decides not to attend college, because it is not a guarantee folks, those funds are not lost and they can be accessed for any purpose. You can say, “All right, I didn’t use it [for] college but I’m going to use it for retirement income down the road.” And if they receive a scholarship or they attend college, they take a different path, your policy’s cash value is not tied to their decisions.
You still have the cash value, you still have the death benefit. You can access it any way you want without any kind of tax penalty. And then another advantage too is if your are applying for financial aid, any cash value in your life insurance is not considered an asset on the FAFSA form. And I actually have a lot of clients that will do this specifically to take money out of the bank, take $40,000 or whatever they have out of their bank accounts and put it in here so that it reduces their expected family contribution on that FAFSA form. So it’s just a loophole how you can maximize what you’re going to get for financial aid.
Steven Gibbs: Sounds like become your own banker in a sense.
So let’s talk about scenarios. For people thinking is this right for me? You want to ensure college saving goals are met, this could be potentially very advantageous just from the standpoint of the guaranteed growth. The interests and dividends that you mentioned, Denise.
We always talk about trading an account for a contract. People, folks need to remember that with a 529, you’ve basically got an account. There’s no guarantee that it’s going to grow. It can take major hits as the markets have been taking as we record this. It could take a long time to recover that and this is a different structure and contractual growth rate. It also could complement traditional college savings, correct?
Denise Boisvert: Absolutely.
Steven Gibbs: Yeah, we talk about that with retirement planning as well. If someone’s got a traditional IRA, that policy component to the retirement plan could be it can really change the math in terms of people not outliving their retirement. Similar here, if you’ve got a 529, this can be an additional funding solution that maybe could be for things that are outside of the scope of what the 529 allows.
Denise Boisvert: Yes. And also I think when people use this vehicle, they don’t restrict as much, like I said before, of what they want to put into it. Because they’re kind of afraid to put a lot into the 529 because what if Joey doesn’t go to college?
Steven Gibbs: Yep, exactly. And that goes to number three here, which is flexibility, people feeling comfortable. This product has riders attached to it. It can be used for chronic illness and all kinds of things. And then of course multipurpose planning. We haven’t really touched on death benefit yet.
Denise Boisvert: Well I think the fact that there is a death benefit and you’re using this for college is a good thing. Because, like I said, if something happens to one of the parents that would’ve put them in a financial situation where they no longer can afford college, that child is maybe out in their junior year. So it protects against that.
Steven Gibbs: We’re talking about permanent life insurance strengths versus 529 plans. We talked about it a lot. Do you want to talk about the structure a little bit? I noticed we’re talking about death benefit and separate cash value account and these kind of things.
Denise Boisvert: So when we deal with a life insurance, for every dollar you pay in premiums, a portion goes towards the death benefit, and then another portion is diverted to a separate cash value account. So basically you’re over-funding the policy. Obviously the death benefit has a cost to it, but you’re putting in more than is needed and that extra money is going into your tax-deferred, tax-free cash value that’s earning interest in dividends and compounding pretty significantly.
But from an investment perspective, whole life insurance is generally the safest kind of permanent life insurance. The issuer credits your count, again, by a guaranteed amount, and then pays you your annual dividends. And that’s, again, based on their claim rate and the mortality rate. It has nothing to do with the stock market. And at this point of the world situation, people are looking for things that are not connected to the stock market.
Steven Gibbs: I’m sure you can talk about people’s perceptions right now, calling you. Even when the markets are good, this is such a great safe haven asset to rely on and have something in, I guess, your portfolio that you’re not worried about, of course.
Denise Boisvert: Because who doesn’t like something that is consistent?
Steven Gibbs: Yep, really.
Denise Boisvert: You know what you’re going to have.
Steven Gibbs: Peace of mind. Yes, for sure.
Denise Boisvert: A return of 3% to 6%, but you also have to remember that return is tax-free. It would equate that to what you would make in the market that’s not tax-free.
Steven Gibbs: This gets into a lot of our content and the things that we talk about, and you can run the numbers. And so I encourage people, if you’re getting started for the first time looking at permanent whole life insurance high cash value, recognize a couple things. One, you need to have somebody skilled like Denise designing it because not every life insurance person’s going to even begin to know how to properly add the cash value and work with the death benefit and these kinds of things to maximize the cash value.
Denise Boisvert: Percent of agents know how to run it correctly.
Steven Gibbs: So we value our experts. And one more advantage I’ll just point out is these tax-free loans. That when you do withdraw from a policy for any reason, if you take a policy loan, there’s no tax implications on that. Which is kind of-
Denise Boisvert: I want to add one extra thing to your loan statement. And when you take a tax-free loan, not only are you not having a taxable event, but when you borrow from these policies, you are still earning interest in dividends on that borrowed money. There is no other vehicle on the planet that you can take money out of an account and still earn interest and dividends on it.
Steven Gibbs: This is a college saving and funding webinar. However, we’re hinting at the power of this asset and utilizing it to create leverage and momentum with your finances.
Denise, I know you’ve got an example brewing here.
Denise Boisvert: I based this and this is on an eight-year-old. So we have 10 years to save for college and the average yearly cost in 10 years looks to be around $80,000. That’s what they’re projecting. So that’s how I’m going to demonstrate the illustration on what you need to do to get $80,000 in 10 years for your child to go to four years of college.
Steven Gibbs: And that could even be … I mean, is that what you’re seeing or is that just a medium point? Because that could even be on the lower end I suppose.
Denise Boisvert: It’s funny because I just had a call with a client and she had an eight-year-old and we were talking about college and they were looking at a policy for infinite banking and I said, “Guess what? You’ve got both in one thing. You can do your infinite banking. You can do your kids college. Pay off the loans that you take out for your kids’ college and still have your retirement income.” It’s so versatile. It’s great.
Steven Gibbs: So you pinpoint at $80,000 as being a good vantage point?
Denise Boisvert: Yeah, I just did the research and that didn’t come out of my head. I was actually looked that up and that’s what they were projecting that college funding would be in 10 years from now.
Just to give you an example of what this looks like for you. So in order to save $80,000 by 2032, which is in 10 years, you would need to put aside $2,666 a month. This illustration is funded with $2,000 a month and I’m going to show you how you can put that $2,000 in a month or an interest in dividends, have that cash value grow and then take out that loan. So basically this is, we’re going to-
Steven Gibbs: So, Denise, just to give a little more context. So this is one that you did for … You actually ran this illustration and this is one you did for a 35-year-old that is looking to basically put $2,000 a month total into a policy. And you did a blend on that, right? So you blended some. You wanted to maximize how much cash could be put in, and so you did some design work on this?
Denise Boisvert: Yes, yes, absolutely. So anytime that we do a policy that we want to maximize the cash value is we want to keep that death benefit as low as possible, but big enough to hold the money that we want to put in. You might say, “Well, why is there a limit?” Because there is what we call a modified endowment contract or a MEC limit, which is big in the infinite banking world.
Basically an IRS regulation saying, “Hey, you know something? You’re treating this like an investment. You’re putting too much money in based on the death benefit and we’re not going to give you tax-free growth.”
So we always want to stay under that limit so that all of our growth is taxable. So it’s kind of like an IRS regulation of how much money we can put to a specific death benefit. So if I’m looking to put-
Steven Gibbs: It means it’s a good … To me it means it’s a good deal and a good thing.
Denise Boisvert: Absolutely, yes. Yes. So if we need to put $24,000 a year into this policy, we need a death benefit of $550,000. So that’s the death benefit of this. And you’re only ever paying for that $550,000 even though your death benefit keeps increasing bigger and bigger, because the reason it’s increasing is because the money you’re putting in is going into the death benefit so that if you die, you don’t lose the money that you’ve put into your policy. It’s represented in your death benefit.
Steven Gibbs: People get confused about that, the cash value is fun-
Denise Boisvert: Very confused
Steven Gibbs: … funding and building that death benefit.
Denise Boisvert: So if we just kind of look at just this first line here, we’re putting in $24,000 for the year and our net cash value at the end of that year is $18,664. So as you can see of the $24,000 you’d put in this policy, $18,664 was actually like over-funding that went into your bank account and it increased the death benefit year one. Remember we started at $550,000, we’re already up to $612,000 because of that extra money.
Steven Gibbs: And that’s immediate cash value in, so a lot of that is just that you’ve your account starting out first year.
Denise Boisvert: That’s right. And the nice thing about these policies is there really is a very minimal, if any, waiting period to take a loan. So if you literally gave them a for $24,000. Within 30 days, you could borrow against the $18,664. That’s how liquid it is. And that’s the reason why I say people are more apt to put more money into it because they’re not afraid that, “Oh my god, if I put $2,000 into my 529 plan, I put it in there and I can’t get it out.” Whereas you put it in here, if you put $2,000 in, you can get $18,000 out at the end of the year. So it is a lot more liquid.
Steven Gibbs: Well, right, and now people need to also know that eventually your cash account’s going to surpass what you’ve got in. So this is just year one that we’re looking at now.
Denise Boisvert: So let’s say, all right, we’re putting it in for the 10 years that we need to put it in. We’ve put in $240,000. Well, actually if we look at year nine, because year 10 is the coming out-
Steven Gibbs: You did some income there. Yep, so you withdrew $80,000 for tuition in year 10.
Denise Boisvert: Exactly. So let’s just look at year nine for a second. You’ve put in $216,000, you have $243,000. Basically you’re breaking even. We call it breaking even as meaning what you’ve put in and what you have is now surpassing. Your gains are now surpassing what you’ve put in, and that’s usually around years six. And that’s how you can tell you have a good plan, if it’s between years five and year six.
Steven Gibbs: Interesting. And they’ve got, at that point, almost a million dollars worth of permanent death benefit, which is exciting there, guys. If you’re 35 and listening to this or whatever age, to me as an estate planner, that permanent death benefit is rock solid and it’s exciting because even other kinds of permanent life don’t really offer that amount of assurance.
Denise Boisvert: That’s right. If this was an ordinary whole life policy, you would not see this break even until probably year 15 or 20. So if you ever get an illustration from someone and the break even is all the way down there, you need to call me. Because now, come on.
Steven Gibbs: Well, yeah, and that’s a great point, Denise. And a lot of the criticisms out there. Some of even the pundits out there, that’s really what they’re talking about. When they criticize this, they’re talking about a traditionally designed whole life policy without any paid up cash value and just be base premium and death benefit. Different animal.
Denise Boisvert: And to be perfectly honest, when people want a traditional whole life policy with me, I teach them this before I have them decide on that. Because I don’t even like to offer a traditional whole life when you can have this. It doesn’t [make] sense.
Steven Gibbs: Well, right, because-
Denise Boisvert: Because the death benefits going to grow to what they need it to be anyhow.
Steven Gibbs: And your knowledge of design, you’re blending some term in the early years into this and that creates a very inexpensive death benefit.
Denise Boisvert: So let’s go back to year 10. So now we’re in year 10 and Joey’s going to college and you need $80,000. You’re going to take a loan from your policy of $80,000. Your total net cash value was $243,000. It does show that it’s diminishing here only because it’s an illustration, but this full amount is still earning interest in dividends for you. Even though you took $80,000 out, that’s still earning for you. And when you take a loan, the cash value is not really affected. It’s the death benefit that they’re using for collateral. So basically that $80,000 is coming right off your death benefit right here.
And there are no … You’ll never get anything from the insurance company saying, “Hey, we need $300 a month towards your loan.” They really do not care if you ever pay it back. They probably hope you don’t. Because when you take out a loan, they’re going to charge you an interest rate and that interest rate is variable and most companies right now, it’s around 4%, and it’s always smart-
Steven Gibbs: No credit. They don’t pull credit or anything like that on these.
Denise Boisvert: No, no. No. We call it a loan, but it’s really just a withdrawal from the savings account is all it is. But it needs to be called a loan so that it’s tax-free. So it’s always-
Steven Gibbs: So Denise, help me understand what. So you got $80,000 of income, which that could either be a policy loan or it could be actual cash withdrawal. But then you got the loan balance of 5710. So how did it work in this case?
Denise Boisvert: Oh, because, yeah, so they’re going to take your basis first. They’re going to be charging you 4% on all of that $80,000, only on what part is the loan, which is the 5710, because you’ve already [had] this money in your account.
Steven Gibbs: So they took it down, you took it down to basis in that year 10, and then they, the balance-
Denise Boisvert: Yes, with balance first and then loans.
Steven Gibbs: The balance was a policy loan. But what you’re saying is there’s flexibility there too. If you wanted to do the whole thing in a policy loan, cool.
Denise Boisvert: But as you can see, you can withdrawal it for four years. Your death benefit does drop. And then if you never decide to pay it back, you don’t have to pay it back. If you don’t pay it back, it’s just going to stay off your death benefit. But your cash value is still going to earn interest in dividends and compound and still continue to push up that death benefit because as your cash value grows, your death benefit grows.
Steven Gibbs: You touched on this, so you could use this for multiple purposes. You could use this for retirement planning down the road. So maybe you’re funding college for a while, maybe you don’t pay that back because it’s just drawing down the death benefit. You could start regular withdrawals later for retirement planning.
Denise Boisvert: So let’s say you retire at the age of 60. We’ll let you retire early. At the age of 60, you have not paid your college loan back, but yet you still have $549,000 of cash value that you could use for retirement income. And you can just take that out as loans so it’s tax-free.
You can say, “Hey, you know something, I need so much in my checking account each and every month.” You can have them deposit that into your checking account each and every month. Or You can say, “You know something, I would like this $549,000 to last for a lifetime.” And you could actually annuitize these. You could take that and they would say, “Okay, you’re 60, your mortality table is to 82. We’ll just divide that evenly over those years and we’ll give you that amount of money pretty much for the rest of your life, past 82, whatever.”
So you can turn it into, if you annuitize it, and I’m probably getting into a whole other subject here, but you would lose your death benefit because you are pretty much exchanging your life policy for an income annuity. But it’s an option that’s always available.
Steven Gibbs: That sounds like another webinar for us.
Denise Boisvert: I think, yeah, maybe.
Steven Gibbs: But that’s a great point though. In other words that there’s so many aspects, the flexibility that you have.
Denise Boisvert: And I think one really point that I always like to tell people, because everyone says, “I don’t want to pay this till I’m age 100.” No, nobody wants to pay [until] age 100 and you don’t have to pay till you’re age 100. So I always like to teach people, how do I stop paying this? Maybe Joey goes to college and you don’t want to fund this anymore ever.
So what is called a reduced paid up is we can shut this off pretty much. Pretty much time after seven years. A lot of times if you try to shut it up before seven years, it’s going to create that MEC condition. But if you want to just fund it for 15 years or just until he is out of school, then we would just do what we’d call a reduced paid up. And basically what that is we’re just telling the insurance company that we no longer want more premiums due on this contract. We don’t want any more financial obligation.
And they’ll say, “That’s fine. You’ve given us this amount of money over the past 15 years and that amount of money has purchased you a death benefit of.” And instead of an 908, they’re going to reduce it. I don’t know, maybe down to six. And then they’ll reduce it. No more premiums can go in, but your cash value is still going to earn interest in dividends like it’s done since day one. So it’s still going to grow and it’s still going to push up that reduced death benefit.
So maybe usually within three or four years you’re back to your 908 and from that point forward, it’s just going to continue to grow even though you’re not putting any money into it just because of the compounding effect of the cash value. Pretty awesome.
Steven Gibbs: That’s awesome. And people that mentored me over the years and talked about doing the hard things early on, this such a good example of that, I think. Obviously you’re spending money, you’re funding this thing up front, but look at the power later on that you have the flexibility, the options.
Denise, I want to do a lot more webinars with you. I think this has been really informative and hopefully really practical for folks that have tuned in. Thank you guys for joining us.
If you’re at a point where you want to look at this for yourself. In other words for your age and your situation, your budget, Denise is going to be available. This is her Calendar link. You can actually access it with this link. We’ll also have most places that you’re watching, we’ll also have a button below. Or you can email Denise at email@example.com to just request a personal meeting, either Zoom or phone call to get started.
Denise, do you have any other parting thoughts?
Denise Boisvert: I do, I do. I don’t want the $2,000 a month to shy people away because it doesn’t have to be $2,000 a month. Something is better than nothing. You do what you can afford and that you’re comfortable with. But again, something is always better than nothing.
Steven Gibbs: Keep an eye out from future topics with Denise. We’ll be rolling out some more and I think we may even hinted at a couple of them today. So Denise, much appreciated and looking forward to doing some more of these and thank you for all that you’re doing to help folks. Help the I&E tribe here.