Prepaying for College: New congressionally blessed tax breaks have almost every state in the country scrambling to set up prepaid-tuition programs that promise to beat college inflation. More than half a million kids are already enrolled. Good move? Maybe, if you’re rich or a passbook saver used to low-single-digit returns. These products will beat the banks and offer tax deferrals pleasing to top-bracketeers. But what about the rest of us?
Remember, when you buy a prepaid contract, you’re betting that tuition inflation, currently running at 6 percent, will rise faster than your return on another investment. It may not–and in fact we’re already seeing signs of a slowdown. Beware, too, that many of these plans hold buried time bombs. Buyers are in for a “huge, rude, horrible awakening” when they realize that prepaying tuition can kill their chances for financial aid, warns Bonnie Hepburn, a college planner in Acton, Mass. And most plans carry heavy penalties if you try to take the money to an out-of-state college.
A smarter way to pay for college tuition is to invest as much as possible, as early as possible, and keep it in the parents’ names. That retains the money for other emergencies and protects it from financial-aid officers and kids who might be tempted to take the money and hit the road. Also think about local junior colleges, three-year plans, five-year plans, deferred-admission programs, home-equity loans and the strategies people use to tame tuitions.
Long-Term Care: These insurance plans promise to pay the potentially bankrupting cost of nursing homes, a worry for almost all of us. Be aware, though, that a new law bestowing tax breaks on these plans also adds new eligibility rules that may make it harder to collect. Industry pros like Reston, Va., broker John Haslett suggest buying such policies before Jan. 1, when the rules kick in. Look for plans that offer coverage for nursing-home care as well as at-home care. Avoid policies that require a “medical necessity” or minimum hospital stay before your coverage activates, that don’t cover the full cost of nursing-home care ($40,000 to $70,000 a year) or that are not adjusted annually for inflation.
Disability Insurance: You may sleep better with insurance that covers lost income if you become too ill or injured to work. But don’t let your nightmares push you into a disability policy that’s not realistic. The chance that you’ll ever be too disabled to earn a living is far less than you’ll hear from your insurance salesman. Before you buy, think about your lifestyle. “If you could do your job from home, you’ve reduced to a minuscule percentage those things that could keep you from earning a living,” says Peter Katt, an insurance planner who doesn’t buy disability coverage for himself. On the other hand, if mobility is a key to your livelihood, pick up a plan that supplements whatever your employer offers. Save money by taking at least a 90-day waiting period before benefits start, and by buying a residual-income policy that will make up lost income if you have to take a lower-paying job–but that won’t guarantee full benefits just because you can’t return to your occupation. And remember the key tax rule about disability insurance: if you (or your employer) deduct the premiums, you will have to pay income taxes on the distributions. So don’t take the deductions, and ask your boss to count the premiums in your taxable income.
If you’re really the type who likes to take care of everything before it happens, why not prepay your funeral, too? Then all you have to worry about at night is whether the undertakers will last as long as you do.
