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By LIZ PULLIAM WESTON
No Need For Frilly Life Insurance Policy
Dear Liz: I’m looking for options to finance college for our four children, ages 13 through 19. One financial planner I've contacted is recommending cashing out equity in my house (potentially $180,000) along with using other assets worth $100,000 to buy a fixed-rate, cash-value universal life policy. I would borrow funds as needed from the policy to pay tuition and other costs. The idea is to become your own bank. Do you recommend this strategy in lieu of taking out other loans? I’m told another advantage to this approach is the ability to shelter assets to qualify for more financial aid.Answer: This strategy makes plenty of sense – for the “financial planner” who recommended it, since she will be rolling in commissions for pushing this expensive, hazardous nonsense.
In case those quotation marks left any doubt, you haven’t been talking to a real, comprehensive financial planner. You’ve been talking to an insurance salesperson who stands to make a lot of money if you follow her advice.
Most people don’t need expensive, permanent life insurance, which is what a universal life policy is meant to be. Term insurance is much cheaper and designed to give you the coverage you need while you need it.
“It does not make sense to buy a life insurance policy unless the primary purpose is because you need life insurance,” said Laura Tarbox, a fee-only financial planner in Newport Beach, Calif. “There may be ancillary benefits to cash value insurance policies, but if you don't need the insurance, don't buy one.”
You also don’t need to be terrified of your assets disqualifying you from financial aid. These formulas weigh your income far more heavily than your assets, said Joe Hurley, a CPA and publisher of the SavingForCollege.com Web site. Furthermore, Hurley said, home equity and retirement savings are ignored in federal financial aid calculations.
Even if that weren’t true, what sense does it make to borrow the same money twice? Remember that “cashing out” equity in your home means getting a bigger mortgage or home equity line of credit, which you’ll have to pay back at six to eight percent interest (or more). What you’re able to invest is further whittled down by the agent’s commissions. And if you borrow too much from the policy, it can “collapse.” A collapse happens when there isn’t enough value left to keep the insurance in place, in which case all those previously tax-free loans become taxable income.
There are other, better ways to plan for your children’s educations. Sites like www.SavingForCollege.com and www.FinAid.org are good places to begin – or you could always talk to a real financial planner. You can get referrals from the National Association of Personal Financial Advisors (www.napfa.org) or The Garrett Planning Network (www.garrettplanningnetwork.com).
Dear Liz: The investments in my 401(k) have dropped over 20 percent over the last year. My investments are mainly invested in stocks because I am relatively young (32), though I recently re-balanced to include some Treasury bills. Most of the investments offered by my company's 401(k) plan have been falling precipitously in recent months. Do you have any advice of how to better manage the drop? I'm not worried about it short term, but shouldn't we periodically adjust our investments given the economic climate to maximize our returns, or at least avoid what will likely be a falling stock market in the short term?
Answer: When you find a crystal ball that will let you do that, please share it with the rest of us.
Seriously, those who try to time the markets by “adjusting” their investments usually wind up selling low and buying back in when stock prices are higher because they miss the subsequent surge. If you’ve got decades until retirement, it doesn’t matter what the stock market does day-to-day or month-to-month anyway. What matters is that stocks beat out other investments over the long term.
The best course is to have a plan, including an asset allocation strategy, and to stick with it regardless of market gyrations. If you don’t have a plan, consider consulting with a Certified Financial Planner or checking out online solutions like www.FinancialEngines.com, which for $40 a quarter can assess your situation, offer asset allocation strategies and help you pick appropriate investments for your 401(k) and individual retirement accounts.
Dear Liz: How do you, after keeping the papers for the required years, get rid of all the papers that were saved in case of an audit? My office shredder will not handle that kind of a load.
Answer: You can find commercial shredding services that will come to your home by typing “business shredding” into an Internet search engine – or you can ask your doctor, dentist or accountant for a referral to the services they use. Get two or three quotes and consider whether investing in a higher-quality shredder might be an option.
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© 2008, No More Red Inc. Liz Pulliam Weston is author of the new book “Easy Money: How to Simplify Your Finances and Get What You Want Out of Life.” She regrets that she cannot respond personally to inquiries, but questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., #238, Studio City, CA 91604, or use the “Contact Liz” form at her website, www.lizweston.com.
