Many term insurance policies require conversion

Dear Bruce: I am 70 years old and have a small-term insurance policy (not my only coverage) purchased through my credit union. I was recently notified that my term policy would expire when I become 75. I was offered the option of converting a portion or the entire policy amount to whole life. I am in good health and do not want to lose the coverage should I live beyond 75 years. I do not need to make this decision until just before my 75th birthday, however, I was told by a company representative that each additional year of age will significantly increase the policy’s premium. What is your advice? – N.H., via e-mail

Dear N.H.: Many term policies must be converted when one reaches an “advanced” age. You’ve indicated that you want to continue the coverage. As often as not, when one takes a term policy out one needs more insurance, and it may very well be that you still need the coverage. If it’s just to leave an insurance estate to heirs, it may be something you should reconsider. The agent is telling you correctly that the premium, if converted at 75, will be greater than it would if you converted it at 70, but it also should be pointed out that you’d pay a whole lot less in premium for the next five years. At the very least, I would consider how much of an insurance estate you really need, and act accordingly.

Dear Bruce: Due to illness, I decided to retire in 2002. I was eligible for full government pension because I had 27 years in the system. I am now 50. My pension is approximately $24,500 annual gross with $2,922 federal taxes deducted from that. In 2003, I earned $15,600 at a part-time job and paid $4,775 in federal tax (including tax on a pension). I had to take out a $2,000 individual retirement account in order to get a $750 refund. I do itemize because of my mortgage, etc. I did my 2004 taxes online. I earned only $4,100 part-time. I paid $3,461 in federal tax (including tax on pension). My refund will be $643 (no IRA). For your information, Kentucky exempts pension from tax, and I will be refunded all of my Kentucky tax on wages due to low income. It seems the more I work, the less I am ahead. Am I missing something? Why so much federal tax? Any suggestions? – L.L. in Kentucky

Dear L.L.: Your lament is a common one. You clearly understand that your pension is fully taxable, and the tax on the pension increases if you earn money outside since you’re taxed on gross income. You say you had to “take out an IRA,” but what you really mean is that you were required to save $2,000 in order to reduce your gross adjusted income. That’s a pretty decent reward for that savings. That having been said, that is always the lament of all of us, the more we earn, the more we pay. That is called the progressive system. There are many that would quarrel with it. Hands up for a flat tax maybe?

Dear Bruce: My husband’s son is 25 years old, just started working full-time and will be attending school part-time to obtain his master’s degree. Since we bought a car for him while he was going to school, we added his car to our insurance policy. If he were to ever have an accident, could we be held accountable since we pay for the insurance? – R.D., via e-mail

Dear R.D.: Isn’t it time to cut the cord? While you purchased the car for him, I assume that it is in his name. If that’s the case, let him go out and buy his own insurance. I see no reason to have any connection to you. It is likely there is no liability on your part. The wisest thing to do would be to let him establish his own life and let him pay the premium.

Dear Bruce: My current employer, who recently purchased the company I work for, has frozen our pension plan. They are about to offer me an opportunity to get involved in their retirement plan, which is a 401(k) with 4 percent of one’s salary being matched. I also have a current 401(k) that is still active from the previous owner, which I am contributing 10 percent of my salary to with no match. I will contribute to the new plan, but my question revolves around the money in my frozen pension plan. I believe there is about $140,000 to which I am entitled. I will be 50 in 2006. Should I roll this money into the new 401(k), which I have been told will have good but limited investment opportunities, or should I take the money and invest in a traditional IRA where I will have unlimited investment opportunities? My wife and I currently each have a Roth IRA, but we are approaching income limitations so the traditional IRA is something I’ve been told is my next best option for this money. I assume I must roll my current 401(k) into the new one. Bottom line is I’m looking for the best financial advice as to where to put my money so that when retirement approaches, I’ll have the best return on my investment. I do have a financial adviser who believes it is a no-brainer to go with the IRA. I’m looking for a good second opinion. – S.L., via e-mail

Dear S.L.: I’m with your financial guy. I would rollover the money into a self-directed IRA simply so that I would have total control as to how the money was to be invested. You can decide precisely what your tolerance for risk is and be guided accordingly. Putting aside the fact that your financial adviser is very likely your broker and will earn a fee if you do the rollover, it still seems to me the best way to go.

Bruce Williams is a national radio talk show host and syndicated columnist.