Is a variable life insurance policy or variable annuity suitable for college savings?

Insurance experts agree that a variable life insurance policy is not the best choice of a policy to use as a savings vehicle for a college education.

• Although variable life insurance has cash value that can increase over time if your underlying investments in the policy perform well, you are also paying life insurance premiums that are quite expensive. Those premium payments will significantly eat into the gains you could make on your cash value.
• The cash value of a life insurance policy should not be considered an investment because any partial withdrawals or loans that you do not pay back will reduce your death benefit. So if you don't pay the loan back, your beneficiaries will when you die.
• If you partially withdraw or take out a loan against your cash value, and the withdrawal or loan amount exceeds the premiums you have paid into the policy, you will be taxed on the difference for variable life policies.
• If you choose to surrender your variable life insurance policy, you also may have to pay a surrender fee to the insurer. Check your policy language for more details.

A variable annuity (VA) can be considered a retirement planning tool, not as an investment vehicle to save money for a college education. Here are some reasons why:

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• VAs carry high fees because the insurance company must charge you for the risk it is assuming to guarantee you a lifetime income. While the average fee for a VA is 2.44 percent, the average fee for a mutual fund is 1.03 percent, according to Morningstar.
• Many VAs require that you pay a surrender fee to get out of the contract. The surrender period is usually six to eight years, and the rate drops each year you're in the contract. For example, you might pay an 7 percent surrender fee if you surrendered in the first year, 6 percent in the second year, and so on. You don't face those kinds of surrender fees in most mutual funds. These fees are often referred to as "back-end sales loads," or "contingent deferred sales charges."
• You will pay a penalty tax if you withdraw money from a VA before age 59.5. You do not face such restrictions with a mutual fund. Also, mutual fund returns are taxed at a capital gains rate, while variable annuity returns are taxed at your ordinary income tax rate, which is much higher.