Lump-sum payout offers best retirement option

Dear Bruce: I am a happily married 59-year-old state employee who will retire at the age of 62. I have a defined-benefit retirement plan that will pay me about $5,400 a month for life, or I can take a partial lump-sum option of $380,000 and $2,700 a month for life. My wife took an early retirement and receives $1,400 per month for life. We will be responsible to pay for our medical insurance once I retire. Our house, valued at $300,000, is paid for, and we have $100,000 in savings, plus another $100,000 in deferred compensation. We have no debt. Finally, my parents and my wife’s parents lived healthy lives into their mid-80s to early 90s. Should I take the $5,400 a month for life, or the $380,000 and $2,700 for life? If I do take the lump sum, what is the best way to protect myself from a major tax hit? – Mike, via e-mail

Dear Mike: Let me get this straight: If you take the $5,400 for life, the day you die it’s gone. If you take $380,000 and the $2,700 a month, then the $380,000 will go to your heirs. The $380,000 invested should very easily equal the difference in monthly income. If you leave the $380,000 with the insurance company, it goes away if you die five days after you retire. To me, it’s a no-brainer. As to the taxes on the lump sum, I would urge you to see a local tax adviser. Taking your situation into account, I think you guys are in fat city. Enjoy your retirement.

Shop around to avoid surcharge

Dear Bruce: I got my homeowners insurance bill the other day and was pretty shocked when I found I was paying extra because of an “adverse credit report.” What adverse credit report? Last time I looked, I had excellent credit ratings. My wife and I have not carried a balance on a credit card in well more than five years. And we have never made a late payment. Looking further, I found “low credit card limits” among the reasons given for the adverse report. I did some quick math and discovered that, on average, we charge about 2 percent of the credit limits each month. That percentage would be lower if we hadn’t canceled a card with a $30,000 limit a few months ago because we never used it. We were told having large credit limits could be used to lower a credit rating because it might mean deeper debt in the future.

Calling the credit card company was useless. They said if I believed the report was in error, I should correct it. According to material I discovered later on the Web, some insurers have concluded they can forecast the future likelihood for someone to make a claim based on this type of credit evaluation, and a few states have bought into this silliness. All I understand is the fact I have never made a claim in 40 years of paying for homeowners insurance – but that doesn’t count. I am left paying a 10 percent surcharge because some prejudiced data analyst says he can tell the future based on a nonsensical probability study. I can find no recourse to get a hearing on this. What in the world is going on? – L.P., Canterbury, N.H.

Dear L.P.: This whole business of what is given weight on credit scores is hard to understand. For example, I am told you’ll get a higher credit score if you have a mortgage than if you don’t. This seems to be supported by the logic you have articulated. That said, fortunately for you, New Hampshire is not a state (like Florida) where it’s difficult to get a homeowners policy. Why not go out and shop? I don’t understand why there would be that penalty, but I have to believe that if you have a decent broker, he or she can find a better deal. As long as everything on your credit report is accurate, there’s little you can do there. I don’t believe you should be penalized in this situation, and I’d be willing to bet even money that a broker could find a new policy to replace this one at the current rate, or even lower.

Term vs. whole life debate continues

Dear Bruce: I am in the process of getting licensed and starting my own life-insurance/financial-planning business. As my education continues, I have to ask myself how I feel about the age-old question: term life or whole life? As I have listened to you often, I know you generally encourage people to buy term and invest the difference. Not a problem for me as I am working on my Series 7. It seems to me, though, that you avoid a blanket indictment on whole-life products. What situations do you think merit whole life? – J.D., via e-mail

Dear J.D.: In general, I do suggest and encourage people to buy term insurance and invest the difference. However, there are situations, particularly end-of-life situations, where buying whole-life insurance can have a favorable impact on large estates.

However, most of the people to whom you will be selling are likely to purchase “death” insurance. They wish to provide for loved ones in case of an untimely demise. This is generally a younger client. Renewable, convertible and without evidence of insurability, term, in my opinion, is the way for most people to go.

That said, you are going to have to do a lot of shopping so you can offer the appropriate products to your clients. There are more than 1,000 companies in this country writing term insurance, many of which are well rated by Standard and Poor’s, but the prices are all over the map. This is a place to do your homework so you can serve your clients well. It may not be that you will get wealthy selling term, but if you gain their trust, there are many other products and services that will benefit both parties.

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