Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, August 8, 1994 TAG: 9408150006
SECTION: BUSINESS PAGE: A6 EDITION: METRO
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
DATELINE: NEW YORK LENGTH: Medium
It's wrong to make you believe that you're buying a plan solely designed for college with a bit of life insurance on the side. It's even worse if the words ``life insurance'' never cross the agent's lips.
Whenever you buy a policy, part of each premium you pay covers the cost of insurance, expenses and sales commissions. What's left goes into a cash reserve that earns interest or dividends tax deferred. That's your ``savings plan.'' When your child goes to college, you normally can access that cash reserve tax free.
But depending on the policy and the time frame, you might earn less from your insurance than you'd get from a bank account. What's more, using your cash reserves may be more expensive than finding a loan from another source.
Some parents in Pittsburgh who learned that the hard way have filed a class-action lawsuit against the Metropolitan Life Insurance Co. They say they were duped into buying policies written on the lives of their children.
Thomas and JoAnn Rostek stripped the bank account that they had built for their 6-year-old daughter and invested the money in a $100,000 policy. Today, after five years and $3,844 in payments, the cash surrender value is worth $3,625. Worse, because of the unusual way their policy was written, any money taken out within the next 14 years - including their daughter's college years - will cost them a 10 percent tax penalty plus income taxes.
In 1991, another plaintiff, U.S. Air Force Sgt. Nathan Bennett, bought $206,250 worth of coverage on his infant son, a startling sum for so small a child. So far, that policy has cost $3,200. Total cash available: $429. The Bennetts and Rosteks wanted college savings, not a windfall payoff if their children died.
MetLife spokesman Charles Sahner says the suit has no merit because these parents knew they were getting life insurance. Under company policy, he adds, people like the Rosteks would have been told that any withdrawals carried a tax penalty. The Rosteks say they were never informed.
Similar problems arose in Florida, where some MetLife agents worked up a pitch for what they called ``MetLife's College Funding Program.'' Again, it was life insurance they were selling, but they targeted members of the state-run Prepaid College Program.
Under that program, Florida residents pay small sums now to cover future tuition and sometimes dormitory costs. Their account is guaranteed to keep up with inflation in state college costs. That's a peace-of-mind promise that insurance can't match. Yet the sales presentation made it appear that MetLife's was the better deal. Some agents also made false statements about what the Florida plan would cover.
MetLife's Sahner says that any buyers who were misled will be reimbursed. They also can be reinstated in the state's prepaid tuition plan with MetLife covering all the costs of making them whole.
Florida has nine other insurers under scrutiny for hustling college savings plans, but no names were released. But even when sales pitches don't mislead, there's a strong case against choosing life insurance for an education fund:
The expenses diminish your savings. As an example, take a 35-year-old woman who buys a $100,000 whole-life MetLife policy, paying around $1,000 a year. Fifteen years and $15,000 later, her cash value would be worth just $21,000 based on the company's current dividend scale. Had that same premium been invested in mutual funds at 10 percent (the stock market's historical average), she'd have had $37,000.
Paying for college with life-insurance savings can be unexpectedly expensive. When you borrow from a policy, the stated interest rate is typically 6 percent to 8 percent. But any time you have a loan outstanding, your insurer may lower the interest or dividends that you earn on your cash values. So your true cost might be higher than you think. If you don't intend to repay the loan (as is often the case), the policy will lose value and might even self-destruct, says Richard Sabo of Money Concepts in Allison Park, Pa. Cash withdrawals from universal-life policies also risk ruining your coverage over the long run. It's safer to opt for a home-equity loan whose interest you can tax-deduct.
So skip the insurance. Choose pure savings or investment plans instead.
by CNB