Q. I am a 74-year-old man with a $40,000 life insurance policy. I have been paying on it for 21 years and it has been building surrender value as well. My current annual report reveals "guaranteed assumptions" of a death benefit of $40,000 for nine more years and a current surrender value of $13,000 - declining to zero at the end of the nine years.
In addition to the "Guaranteed assumptions" there is another column labeled "current non-guaranteed assumptions" (these may be changed by the insurance company). It shows the death benefit of $40,000 running through age 84 and a current surrender value of $14,100 that will increase to $22,000 at the age of 84, and $44,000 at age 94.
I can't get a "good" feeling from the insurance company regarding the guaranteed assumptions versus the non-guaranteed assumptions. I am wondering if I should seriously consider redeeming the policy for its surrender value in the near future. —L.H., Austin, TX
A. The real question here isn't what your cash value is earning. It is whether you still need to protect someone else by providing $40,000 in the event of your death. If not, continuing the policy is reduced to a speculation about dying young vs. dying old.
Unless you can name someone who will truly need that $40,000 death benefit upon your demise, the cash value of the policy is really a savings account set up to assure the insurance company that it will receive its annual premium plus the equivalent of a daily lottery ticket purchased for your beneficiary. You might have a better use for the money. In addition, your beneficiary might have a better use for $13,000 today than for $40,000 at an uncertain date in the future.
The size of the policy also suggests that you don't need a death benefit to deal with estate taxes. Like the vast majority of Americans, you probably don't need to concern yourself with estate tax issues.
Q. We need some advice on possibly rolling over 403(b) retirement fund mandatory distributions into our Roth IRAs. My wife and I live comfortably on a military retirement, Social Security, and income from stocks, CDs, and two rental houses. We can add significantly to our savings each year. We have no debts, live on a cash basis, and pay off two credit cards monthly. Next year we must plan to start withdrawing from IRAs, a SEP, and the 403(b). Since we don’t expect to need the withdrawn mandatory funds for our day-to-day living expenses, can we roll those funds into our Roth IRAs? —J.J. by email
A. Quite a few people would like to do that but the regulations don't allow it. To move money from an IRA or other qualified plan to a Roth after age 70 1/2 you must first take your RMD and pay taxes on it. Additional money can be withdrawn, creating still more taxable income, and that money can be put into a Roth account. Unfortunately, the combination of an RMD and an additional withdrawal often pushes people into relatively high tax brackets. This pretty much defeats the purpose of Roth conversion.
The best alternative is to reinvest your after-tax RMD cash in a tax-efficient or tax-deferred investment. Broad equity funds such as the Vanguard Total Market Index ETF (ticker: VTI), Schwab Multi-Cap Core ETF (ticker: SCHB), Fidelity Spartan Total Market Index Fund (ticker: FSTMX) or iShares Core S&P Total U.S. Market ETF (ticker: ITOT) are good low-cost candidates. You'll have a modest taxable dividend income, but otherwise little or no taxes to pay until you sell part or all of the investment.
If you'd rather avoid risk, you should explore the large variety of CD-like tax-deferred annuities. One place to explore is mrannuity.com. This website, used for data purposes only, has a weekly list of top yielding CD-like annuities. Recently, yields were far better than comparable maturity Treasury obligations and CDs. Here’s an example. While the 5-year Treasury is yielding 0.68 percent and the average yield on a 5-year CD is 0.49 percent, the top yield 5-year CD on bankrate.com was 1.54 percent. But on the mrannuity top10 list you can find a 5-year annuity at 3.05 percent. Big difference.