WILL INSURANCE FOR MY BABY PAY FOR HIS EDUCATION?
By Marlys Harris Reporter associate: Barbara Solomon

(MONEY Magazine) – Q Is it practical to buy a life insurance policy for my newborn son -- either to guarantee that he will be insurable later in life or to save for his college education? B.L. Andaya Jr. Middletown, Conn.

A Despite the hate mail I'll get from the folks who peddle life insurance (trust me -- they'd sell you a policy on your parakeet if they could), I will tell you that I am totally against buying life insurance for children or other small, defenseless beings. The major purpose of life insurance is to provide for dependents. A kid has no dependents, so why does he need insurance? Salespeople argue that by starting your son on a whole life policy now he will be insurable for eternity. They contend that if your son is stricken by some dread disease at, say, age 14, he might not be able to get life insurance at a reasonable cost when he needs it -- as an adult. In my opinion, that argument is lame. If your son maintains average health, he will be able to buy a cheap term life policy when he starts a family and needs the coverage to protect his own dependents. If he has major health problems before he turns 18, then buy a rider for him under your policy; for an extra $24 a year (an amount that shouldn't strain your budget), you could insure him until he turns 25. Another sales pitch on behalf of baby whole life is that it makes a good savings vehicle for college funds. Fie, I say. The commissions on whole life policies are so huge (commission, fees and insurance costs typically eat 50% to 100% of your first year's premium) that your baby will not get his money's worth. Want proof? Suppose you had taken out a $100,000 whole life policy on a newborn 20 years ago, paying about $600 in premiums a year. According to calculations by Peter Katt, a fee-only life insurance adviser in West Bloomfield, Mich., that policy would have built up a cash value of $28,066 today. But to get at the money, you would need to borrow against the policy at a rate of about 8% (a home-equity loan at 7.4% would be cheaper). Alternatively, you could withdraw the cash, but then you would pay income taxes, leaving you with only $23,086. A smarter course would have been to put that same $600 a year into a good no-load stock mutual fund. If the fund had risen in step with Standard & Poor's 500-stock index, Katt figures your college kitty would have grown to an impressive $43,799.

Q My husband took out a $1,200 student loan in 1962 and paid it off by 1968. In 1986, however, the U.S. Department of Education wrote us a letter demanding payment for about $1,000 of the loan that it claimed had never been paid. No one had notified us before then that the loan was in default. We've protested and had several hearings with Education Department officials, but we have no proof from 25 years ago that the loan was paid in full. The Department of Education now wants about $2,700 -- $1,900 in principal, fees and accrued interest and an $800 collection agency fee. Isn't there a statute of limitations on these loans? Beverly Levy Allentown, Pa.

A For starters, forget about any statute of limitations: Congress did away with them for student loans in 1992. That means the government can collect until you're in the grave -- and probably after. Moreover, we could find no explanation for why you never received default notices. At MONEY's request, Tom Pestka, deputy director for debt collection at the Office of Post- Secondary Education in Washington, D.C., unearthed your file from a vault in Texas and discovered at least two addresses to which default notices were supposedly sent that matched past addresses of yours. That aside, though, Pestka says the government would be willing to waive the $800 collection agency fee if you pay the other $1,900. I say: Take the deal, and comfort yourself with the thought that you are paying in dollars that are worth only 24% of their value back in '68.

Q Last spring, we applied to refinance our $180,000 mortgage with a 15-year fixed-rate loan. We paid the bank one point -- $1,800 -- to lock in the 6.85% rate until closing. Because of various delays, we couldn't close until September, by which time mortgage rates had fallen by more than one-half of a percentage point. The bank,however, wouldn't adjust our rate or return our $1,800. As a result, we forfeited the money and had to approach another bank, where we are now refinancing at 6.15%. Can we still deduct on our taxes the $1,800 that we paid to the first bank, as we would any other mortgage interest payment? Helen Bethell Manchester, Mass.

A According to Henry Holmes of the Internal Revenue Service, you could deduct the $1,800 only if it was prepaid interest and identified as such at the closing. Since you didn't take the loan, though, the IRS would treatthe payment as an up-front commitment fee that wouldn't be deductible. But don't feel bad: By cleverly holding out for the 6.15% rate, you lowered your mortgage payment by $69.26 a month. That means you'll recoup your $1,800 loss in a little more than two years and come out $12,467 ahead over the 15-year life of your loan.