Cash-out penalties apply to tax-sheltered investments

Dear Bruce: I have a variable appreciable life policy. I am thinking of canceling the policy and taking the cash value out. The expenses on this are high, and I have not been happy with the results of the investment options available to me. I feel I can better spend the premiums on other investments. Further, at age 56, I do not feel I need the coverage since I am single, have no family and have more than enough whole life coverage through other policies to cover my mortgage and burial. This is in addition to term coverage provided by my employer. I have had the policy about 15 years, and it is my understanding that if I do this, I am not subject to cancellation charges. The difference between the cash value and the premiums I have paid is treated as ordinary income. In addition, since I am not 59-1/2, a penalty of 10 percent will be assessed. Is this correct? Is there a way I can roll this into an individual retirement account or similar instrument and avoid the penalty? – M.C., Wabash, Ind.

Dear M.C.: You have me a bit confused. I assume you’re saying you have a variable life policy that is a combination of term and investment. It seems that you have coverage that you don’t need: You have no obligations and enough to take care of your burial and your mortgage, which simply means you’re going to leave a larger estate to somebody. I’m also confused as to why the 59-1/2 and 10 percent is a factor. That only applies to a tax-sheltered investment such as a 401(k), IRA, etc. I’m confident that this is not the case. I know of no way this can be rolled into any tax-deferred instrument, nor do I know any reason why that is on your horizon. You could open a Roth IRA, if you don’t have one, assuming you meet the income limitations. That aside, the fundamental here is that you have insurance you don’t need and are unhappy with. Why in the world would you want to continue?

Dear Bruce: Could you please give me a brief refresher as to the proper life insurance coverage (term versus whole life, etc.). I am a 30-year-old male in good health with about $1 million in farmland liabilities. Any help/advice is much appreciated. Thanks a million! – R.D. (no address given)

Dear R.D.: I’m glad to hear that things are working well for you. Like many people, as a young person, details with adulthood get overlooked. It’s my opinion that the only appropriate insurance for the circumstance that you described would be convertible and renewable term insurance. This is the least-expensive coverage, and what you are looking for is “death” insurance, so that, in the event that you suddenly die, the money will be there for your family to maintain the farm interest without the huge debt. It will be observed by some insurance folks that years from now the cost of term insurance will increase dramatically – this is true. It is also very possible that your need for insurance 20 to 30 years from now will be very diminished, and, at that point, it is perfectly proper to drop the coverage. Some will observe that you pay for all this coverage and get nothing for it. It has always been my view that I hope my insurance company makes a ton since they only pay upon my demise. I hope they make a ton on you and you enjoy a long life. You should know that there are hundreds of companies selling term insurance so you must shop diligently.

Dear Bruce: We are in our late 30s each earning less than $35,000. Both of our firms offer 401(k)s administered by the same financial group. Both firms have limited plans offering fewer than 10 funds from which to choose and all carry high front-end loads. Our firms match the first 3 percent and 50 cents on the dollar for the next 3 percent.

It appears to us that our retirement funds are getting ripped off. We opened our own fully funded Roth IRAs and have done well with the choice that we have made (i.e.. no-load funds). We are thinking of quitting our 401(k)s or only investing the minimum to get the employer’s contribution. We will continue to fund the Roth IRAs. Are we missing something? Is the next big scandal showing people like us getting ripped off? – E.V., via e-mail

Dear E.V.: You mentioned that you’ve done well with your no-load Roth IRAs. I’m happy for you. Suppose, however, those funds go south? Who, then, is ripping you off? The employers have chosen this company for whatever reason to handle their retirement offerings. You have no obligation to participate. To turn down this type of a “bonus” of, in essence, 4.5 percent of your salary would be insanity. Somewhere, someplace, someone has to be paid for handling these funds. There is no free lunch. You mentioned that you work for small firms. You could suggest to your employers that they consider using another administrator with other fund choices. Good luck with your investments.

Dear Bruce: Is purchasing flight insurance a good thing to do? I’m going to Israel soon and the cost of the ticket is $1,240. – Jani, via e-mail

Dear Jani: I think you’re talking about trip insurance. If you are in decent health and since you are traveling so soon, I would not even consider buying trip insurance. Perhaps only when you’re in a far more involved itinerary does it make sense.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.