One of the wonders of the internet is the ability of purveyors of products and services to reach millions of folks at a very low expense. Unlike mailers with their printing, postage and related costs, it takes very little to get your idea out there, especially if you can purchase a list of e-mail addresses for your target audience. These sales pitches – because that is exactly what they are, no matter how disguised – promise to save you money, protect your assets, provide great returns, reduce or avoid taxes. In short, your life will be better, they say, if you take advantage (interesting thought) of the offer.
Who is taking advantage? It is not the YOU, the buyer or the customer. In pretty much every one of these deals, the seller is guaranteed to benefit while you, the purchaser, might garner some benefit but in many cases will not only fail to receive the entire promised benefit but may actually end up in a worse position.
In the financial industry, these offers abound. Whether it is the secret loophole that allows you to invest your IRA money in bullion or the stock picking newsletter or tip that will let you make ten, twenty, thirty times your investment, you are special and are going to profit thanks to those kindly folks selling you those secrets.
One of the most egregious of these ploys, recently brought to my attention by an adviser, is the notion that one’s child can qualify for more college financial aid if the parent buys a large life insurance policy. The idea is to convert countable assets (savings and brokerage accounts) to assets (life insurance) that do not count towards determining what the estimated family contribution to college costs should be, thus increasing the amount of financial aid the child may be eligible to receive. And guess what? You can borrow against that insurance to fund college costs! Neat, huh?
Not really. The real driver of the determination of family contribution turns out not to be assets but is the income of the parent. It would be an atypical case where the income was so low and the assets (which do not include retirement accounts) large enough that the conversion of such assets to non-countable status might have an appreciable effect on the EFC. The insurance would require a significant initial investment and likely a continuing expense to the family budget. Loans would require payment of above market interest and could result in taxes and penalties.
And that is not all. The substantial commission paid to the insurance agent would not be impacted by your success or lack of success in obtaining financial aid using this technique. The payment of commission will be made without regard to your interests or the actual benefit you receive.