Principal SPIA

[regularAgent]

I read the whole post to understand it and in the end I ask:
If what you client wants is to have performance and flexibility in a short period of time and have advantages in tax.

I think the most convenient is to use an SPIUL

They can take out loans for the estimated period of time and their only consideration will be to prevent the policy from being lapse and they will not pay any TAX, later on they can put some more money into the contract and keep it running.

Single Premium Indexed Universal Life vs CD's and Money Market Rates

 

[DHK]

Um... no. All gains in a SPIUL would be subject to taxation upon loan or withdrawal. Your statement that "they will not pay any TAX" is factually incorrect if they plan to touch the cash values of the policy at any time.

 

[scagnt83]

I read the whole post to understand it and in the end I ask:
If what you client wants is to have performance and flexibility in a short period of time and have advantages in tax.

I think the most convenient is to use an SPIUL

They can take out loans for the estimated period of time and their only consideration will be to prevent the policy from being lapse and they will not pay any TAX, later on they can put some more money into the contract and keep it running.

As DHK pointed out, you are 100% incorrect.

A SPIUL is a MEC (unless it is extremely underfunded).

The Cash Values in a MEC are taxed just like an Annuity. So not only would gains be subject to income tax, but it would also be subject to the 10% IRS penalty for withdrawals before age 59.5

---

You should read the article you posted. It points out that a SPIUL is a MEC and is taxable.

 

[celiothrkn]

This post reminds me of some city council meetings when I was on the board...



Maybe I'm the dense one here (wouldn't be the first time, won't be the last) but what exactly are you attempting to do celiothrkn?

From the above, you may be trying to put it all in one place which might not be the best way to treat it. Is the client looking for growth with flexibility?

Seems to me you need to know what is wanted, what is needed... most likely you will need to split the funds up to accomplish some of what I think you are looking for... just a thought.

To recap, there are $420K of funds that are earmarked for tuition payable starting 1 year from now ($70K due June each year from 2019 to 2024).

Most people's impression of CDs is that they only pay pennies. But I've identified CapitalOne, Goldman Sachs, and Barclays as pretty favorable choices. As of writing, a 5-year CD will pay 2.75% or 2.80%, depending on which bank you choose. The original thought was to stagger the CDs such that we buy a 1-year CD for $70K, a 2-year CD for $70K, a 3-year CD for $70K, etc.

Given the short timeline in which we need to access the funds, I had ruled out starting an IUL because (1) IUL costs are high in initial years and (2) IULs perform best when given time, which we don't have. Were we to do an IUL, we'd have to be single premium'ing this thing, which would automatically MEC the policy. The IUL option could've worked in conjunction with variable policy loans, which should not be taxable if they go unpaid so long as the policy doesn't lapse. In theory, it's a good move if you believe that the market will outperform the loan rate (i.e. 5% or 6% depending on the carrier).

After ruling out an IUL, my thoughts shifted over to a SPIA because it has (1) no intrinsic cost, (2) can have a specific schedule of distributions such as each June, and (3) lets us drop all of the amount in on day one via a single premium. But ultimately the CDs' return still beat all of the SPIA quotes that I had gathered, so I ruled out a SPIA.

Here's something else I considered. Instead of trying to find one solution for the entire lump of cash, maybe we split it up. For the first few years of tuition, it'd still have to go into a CD. But maybe we put the last year's worth of tuition into an accumulation (deferred) annuity with a 5-year surrender period. That way, we still get some market-based growth potential. Then, only when the surrender period ends, we liquidate that annuity and take the gains. Of course, the gains will be taxable and subject to a 10% penalty (since the client will still be pre-59.5). Not ideal, but it is an option.

Ultimately, the goal is to grow the cash that has been earmarked and set aside for tuition payments in the years before it is actually paid to the academic institution.

Lastly, thank you everyone who has contributed to this thread thus far. I appreciate it.

 

[Tahoe Ray]

To recap, there are $420K of funds that are earmarked for tuition payable starting 1 year from now ($70K due June each year from 2019 to 2024).

Most people's impression of CDs is that they only pay pennies. But I've identified CapitalOne, Goldman Sachs, and Barclays as pretty favorable choices. As of writing, a 5-year CD will pay 2.75% or 2.80%, depending on which bank you choose. The original thought was to stagger the CDs such that we buy a 1-year CD for $70K, a 2-year CD for $70K, a 3-year CD for $70K, etc.

Given the short timeline in which we need to access the funds, I had ruled out starting an IUL because (1) IUL costs are high in initial years and (2) IULs perform best when given time, which we don't have. Were we to do an IUL, we'd have to be single premium'ing this thing, which would automatically MEC the policy. The IUL option could've worked in conjunction with variable policy loans, which should not be taxable if they go unpaid so long as the policy doesn't lapse. In theory, it's a good move if you believe that the market will outperform the loan rate (i.e. 5% or 6% depending on the carrier).

After ruling out an IUL, my thoughts shifted over to a SPIA because it has (1) no intrinsic cost, (2) can have a specific schedule of distributions such as each June, and (3) lets us drop all of the amount in on day one via a single premium. But ultimately the CDs' return still beat all of the SPIA quotes that I had gathered, so I ruled out a SPIA.

Here's something else I considered. Instead of trying to find one solution for the entire lump of cash, maybe we split it up. For the first few years of tuition, it'd still have to go into a CD. But maybe we put the last year's worth of tuition into an accumulation (deferred) annuity with a 5-year surrender period. That way, we still get some market-based growth potential. Then, only when the surrender period ends, we liquidate that annuity and take the gains. Of course, the gains will be taxable and subject to a 10% penalty (since the client will still be pre-59.5). Not ideal, but it is an option.

Ultimately, the goal is to grow the cash that has been earmarked and set aside for tuition payments in the years before it is actually paid to the academic institution.

Lastly, thank you everyone who has contributed to this thread thus far. I appreciate it.

Your client can ladder MYGAs from year 3 on. The concern will be the 10% penalty on earnings due to age. You'll need to evaluate the higher potential earnings (and tax deferral, no FDIC, etc.) Vs. CD rates to see if that is worthwhile.

 

[DHK]

Given the short timeline in which we need to access the funds, I had ruled out starting an IUL because (1) IUL costs are high in initial years and (2) IULs perform best when given time, which we don't have.

And that's where you missed a key part of my original post to you: IUL with waiver of surrender charges. That would generally be Midland or North American (same company). This can GREATLY enhance the initial liquidity of the contract.

 

[JD AgentMan]

If you are considering using CDs, which I'm sure would be included on the FAFSA, why not consider using a 529 College Savings Plan at least for the amount of funds that the client is sure will be used for college. Many states will give a state income tax deduction for the contributions for that particular states sponsored plan, usually up to a limit. Then the funds can be put to work based on the clients tolerance for risk in a variety funds for growth, and the funds used for qualified educational expenses are withdrawn tax free. No worries about any 10% early withdrawal penalty. There would be a 10% penalty if these funds were not used for educational expense, but the parent could switch beneficiaries to use for another child, or like I said, only use this for some of the funds.