HELOC/Life insurance
Good afternoon,
Has anyone had experience with funneling college dollars through a HELOC and then through a life insurance policy that you then borrow from to pay tuition?
ChatGPT sounds very skeptical about this but a friend is considering it anyway so I thought I'd ask here if anyone has thoughts/experience with it.
Thank you, Carrie
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Comments
What is the proposed benefit?
It sounds like an overly complex scheme that adds risk and complexity. It adds a lot of expense as well as far as the life insurance is concerned. Those policies don’t break even and create cash value (what people borrow from) for years because of the high fees. Student loans and 529s are very effective ways to pay for education.
It would be helpful to know more specifics and the goals your friend is wanting to achieve.
This sounds nuts. If it was remotely a best practice, it'd be common knowledge and "what is done" in the FI community. The insurance policy needed would be the largely-dumb "whole life" variety vs the "Term Life" most should hold, if holding life insurance. There's several layers of borrowing, each with risks.
I have experience using HELOCs, but never in connection with life insurance. I'd tread carefully and make sure you go in eyes wide open because there are often snakes in the grass anytime life insurance is bundled to financial mechanisms. Without more info my gut would advise against it.
I used a HELOC to help pay down a mortgage back in 2011. It worked well enough for 2 reasons: (1) heloc interetest rate (2.49%) was lower than my mortagage (5.25%) and (2) the idle cash in my bank (about $20k) earning nearly 0% interest I could than shovel at my mortgage. For the next year at the end of the month if my checking account had a positive balance, then I prepaid down my mortgage. The combination of lower heloc interest rate and also the opportunity cost of a 0% checking/savings account, it made sense financially. The HELOC I got had nearly no fees to setup or operate so it worked out.
The danger with HELOCs is usually they are tied to variable interest rates, so you don't want to do anything that requires you to keep a balance for multiple years.
Thank you for the thoughtful response. I will share this with my friend now. We are very skeptical too but good to hear from another.
And a heloc line of credit can be dropped at any time.
I would be very curious about the interest rate charged on both the insurance policy and the heloc, it isn't a great environment for borrowing right now in my opinion.
I'm using 529 + brokerage.