Variable Life Insurance Policy Not a Good Choice for Single Mother
Question: In 1998, I began investing in a variable life insurance policy with a death benefit of $250,000. I began this plan in hopes of increasing my monthly investment as time went on. Well, my financial situation has worsened. I am 39, a single mother of three minor children and I make $30,000 a year. I receive little or no child support. I’m paying $1,100 a year for this policy and am concerned that I’m throwing my money away. My financial advisor--who, by the way, recommended this plan--tells me he wouldn’t be able to find a life insurance policy at the rate I currently pay and tells me to stick with it.
Answer: You are not an ideal candidate for a variable life policy, to say the least.
Variable life policies combine life insurance with an investment feature. Insurance experts will tell you these policies are most appropriate for high-income people with plenty of disposable income who already have exhausted other means of saving for retirement by contributing the maximum allowed to 401(k)s, IRAs and other plans.
Does that sound like you?
Variable life policies also come with hefty commissions for the insurance agents who sell them. But surely that’s not why your agent is curiously blind to the fact that you can get a lot more coverage, for a lot less money, by buying term insurance. A $250,000 policy for a woman your age in good health could cost as little as $150 a year.
Cashing in your policy will be painful, however. You’re facing a significant surrender charge, and you haven’t had enough time to build up more than a token cash value. As you can tell from the illustrations your agent provided, these types of policies need years of steady payments to build up much worth. Of the $2,000 to $3,000 you’ve paid in, you’re looking at getting less than $400 back.
You might justify continuing to invest in your policy if you expected your financial situation to improve dramatically--and soon. But continuing to spend so much on coverage that’s no longer appropriate--if it ever was--doesn’t appear to make much sense.
If you decide to cash out, be sure you have a term policy in place first. With three kids depending on your income alone, you definitely need the coverage. You can shop for rates at one of the Internet shopping services such as InsWeb.com or Quotesmith.com.
Debit and ATM Cards Aren’t the Same
Question: Your recent answer to the question about debit cards was confusing. You kept alternating between “true” debit cards (which require a personal identification number to use) and what I call “fake Visa cards,” which can be used just like credit cards. You failed to describe the differences between the two cards adequately. Regular debit cards require a PIN and often have a limit on how much you can spend, so it’s not very easy for a thief to clean out an account with it. Fake Visa cards, on the other hand, apparently don’t have a limit on usage. These are very dangerous to possess and use for the reasons you stated. I hope you can address this in your column.
Answer: It’s no wonder you were confused.
What you’re calling a “debit card” is actually an ATM card. You can tell because it doesn’t have a credit card logo, such as that of Visa or MasterCard, and it requires the use of a PIN.
A debit card, by contrast, looks and acts like a credit card. It has a credit card logo and doesn’t require a PIN for many transactions. You also can use a debit card like an ATM card, to get cash from a machine, for example.
Both cards are directly linked to your checking account, so purchases you make with them are deducted from your balance.
You’re right that it’s easier for a thief to clean out an account with a debit card than with an ATM card. But Visa and MasterCard have extended their “zero liability” policies to their debit cards, so users whose cards are stolen or used fraudulently are reimbursed.
More merchants accept debit cards than ATM cards, so many people find the convenience of debit cards outweighs those risks. But if you’re not comfortable with carrying a debit card, by all means stick to your ATM version.
Penalties Don’t Affect Defined Benefit Plan
Question: You recently answered a question about early-retirement distributions by saying that “anyone who taps a retirement fund before age 59 1/2 can be subject to penalties,” although you added that there are exceptions to this rule. I hope and assume that the penalties you were talking about apply only to people who withdraw from 401(k) plans, IRAs and the like, and not to someone who retires in his or her 50s and draws a pension from a company’s defined benefit plan. Or would dollars received from such a plan be subject to an IRS penalty?
Answer: One of the ways to avoid early-withdrawal penalties from a retirement plan is to take “substantially equal periodic payments” from the plan, basing the withdrawals on your life expectancy. And that’s pretty much what a pension does--you get regular payments spread out over your lifetime. So relax and enjoy your retirement.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at moneytalk@latimes.com or in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries.
