Dear Quentin
My father bought me life insurance when I was a child in case I “kicked the bucket” and had to cover burial costs. When I became an adult, he handed over the insurance to me and I have been paying annual premiums (which are really low) for over 30 years now. I am currently in my 50s and have no family. I don't have any children, I don't have any siblings, etc.
The policy has a cash value of approximately $12,000 and is scheduled to be renewed in September of this year. I was thinking of cashing it out and using that money to max out my SEP or Roth IRA for the year. Can I increase both to their maximum value? Or just one? If I have any left over, I'll either buy government bonds or put it in a high-yield savings account or CD.
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An insurance company representative said one option is to cash out the money in two installments over two years to reduce the tax burden. It's hard to trust advice from your insurance company because their number one priority is your own benefit. Do you have any advice on the best way to cash out your insurance?
Last year, I was bitten by a stray cat and developed sepsis and was hospitalized, but my savings were wiped out by the co-payments, so I'd like to rebuild them.
I'm no longer a cat friend
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Dear friend,
I feel for the cat as much as you do.
A trip to the hospital may sound pretty dramatic, but for anyone reading your letter, there is a risk of tetanus and rabies, so any animal bite should be taken seriously and treated immediately. This is a warning to do so. Wounds can also cause bacterial infections. According to Johns Hopkins University, cats are more likely to contract rabies than dogs in the United States.
Whether you cash out now or not depends on your life insurance plan's long-term outlook and financial situation. Since you've been going through a lot with your health lately, my only advice is to not make rash decisions. Sometimes taking no action is a worthwhile action, at least for now.That's $12,000 teeth a lot of money.
And what if you actually decide to cash out? In the current environment, you should be able to earn more than 5% APY on a high-yield savings account. And yes, in addition to CDs, other options with zero or near-zero risk include high-yield savings accounts and Treasury bills. Money market funds also have very low risk.
It's very easy to buy government bonds without any fees or charges. Check out the U.S. Treasury's tentative bid schedule. Auctions for 3-year, 10-year, and 30-year bonds are typically held quarterly, but you can stay on top of bids for longer-term bonds. You can also see the detailed schedule here.
Under Internal Revenue Service rules, the contribution limits for SIMPLE IRA plans (or employee savings incentive match plans) that require earned income are separate from the limits for SEP plans. “If you are not also the owner of your employer's business, you can contribute the maximum amount to both plans,” he says, the IRS says.
It is always recommended to have an emergency fund that is equal to at least 6 months of living expenses. Also, as you pointed out, interest rates remain high, so high-yield savings accounts and certificates of deposit can still yield high returns. CD rates typically track the federal funds rate and currently offer annualized yields of up to 5.36%.
Inflation continues to decline, with figures released this week showing a year-on-year rate of 3.4% in April, down from 3.5% in the previous month. Additionally, the unemployment rate remains low. Economists estimate that the recession will likely be mild. So the interest rates you earn on CDs and savings accounts are still (fortunately) higher than the rate of inflation.
Converting life insurance policy into cash
You don't have to pay tax on the premiums you pay, but on the dividends and interest on the life insurance policy itself. So, if you cash out later, you're more likely to get taxable gains. The IRS details the tax implications of cashing out life insurance here.
If this is the only license a life insurance agent holds, they do not necessarily have a fiduciary duty to protect your interests when they sell insurance. Despite your agent's explanation, cash advances may be taxable whether paid in installments or not. You need to know the actual cash value, total premiums paid, and surrender charges.
Separately, a new Department of Labor rule scheduled to go into effect in September expands the scope of fiduciary duties under the Employee Retirement Income Security Act of 1974, putting client goals and accounting ahead of agency finances. This guarantees that What I'm interested in. (This applies to investment advice, not insurance sales)
Legal publisher JD Supra states: “A fiduciary for investment advice is limited to a person who provides advice on a regular basis, with a mutual agreement that the advice will be the primary basis for the investor's investment decisions in retirement.'' It's gone.'' service. This applies to broker-dealers, advisors, banks, and insurance companies.
“Importantly, these changes extend fiduciary status to ‘one-off’ advice, including advice in relation to rollover transactions,” the report adds. . “Given the removal of the mutual agreement requirement, the final regulations make clear that fiduciary status does not apply to providers marketing their own services absent an investment recommendation.”
At a Congressional hearing on Capitol Hill earlier this year, Susan Neely, president and CEO of the Council of Life Insurers of America, said Americans “certainly have more options for lifetime income.” and asked for the new rules to be revoked. Without it, you won't have any income in retirement. ”
However, I am primarily interested in life insurance plans at the moment. What is the need for this policy if there are no beneficiaries? Assuming he doesn't need the $12,000 for burial costs, he might be better off cashing it out. Rest for at least a few weeks after a bite, seek independent advice from a CPA, and review all your options.
As for your nickname, “I'm no longer a cat friend,” don't say never. A less fearful cat can sneak up on you when you least expect it.
Previous columns by Quentin Fottrell:
“They left nothing but junk.” My brother and his wife emptied my father's house. It has remained empty for many years after his death. What now?
“Is this creepy?” I want to give my 13-year-old daughter her late grandfather's iPhone. Refurbished models cost $200.
My father “deliberately and hurtfully” cut out his late sister’s two children from his will. How can we make sure they get their fair share?
