Indexed Universal Life

Question: Because I was the beneficiary of my husband’s life insurance policies, I find myself sitting on a bit of cash that I need to be prudent with. I am in my mid forties and work a part time job which means my annual income is negligible. My financial advisor is nudging me toward putting about a quarter of my money into an indexed universal life policy (actually 2 policies which pay the death benefit over different periods of time). He is talking about front loading it with cash, with as minimal a face value amount as possible to save on the actual insurance cost. He also says this wouldn’t need to be reported on FAFSA [Free Application for Federal Student Aid]. I’m not so certain that investing in life insurance is my best option. The break even point to recoup my initial investment would be about ten years. My largest known financial outlay will be putting my son through college (he is currently a sophomore in high school). Is using life insurance as an investment tool the wisest choice in my circumstance?
Thank you in advance.


Answer: Life insurance should be used to provide for dependents when someone dies before fulfilling his or her obligations. If your husband’s policy provided enough to take care of your son through college in the event of your passing, I don’t see the value in any form of life insurance.

Only 5.64% of parental assets are included in the parent’s expected contribution to the cost of college each year, making it unlikely that some expensive scheme to reduce the assets being counted by FAFSA would justify the cost. Besides, aid is primarily loans, not grants. Help your son make a responsible college choice rather than put yourself or him into debt.

I wouldn’t suggest relying on a financial adviser who recommends life insurance in your circumstances. Choose a fee-only adviser who doesn’t benefit from selling you particular products. You can use insurance agents to the extent your independent adviser recommends insurance, but try to separate the salesman from the adviser.

Since you are so young, you need an adviser who will recommend a diversified portfolio, primarily stocks, with enough in low-volatility investments to address your short-term needs. The cash you’re definitely committing to your son’s college education can go into a 529 savings plan (your state’s plan should be considered first if it gives you a tax benefit) and earn tax-free income, making things a little easier.