February 17, 2019
This Spring, Simply Money Advisors is becoming Allworth Financial. As we expand our services to better meet your retirement planning needs, we needed a name that encompasses all that we are. Don’t worry. We’ll still deliver our same no-nonsense money advice every week in the Simply Money column, presented by Allworth Financial.
Thomas from Cleves: I’m 62 and about to retire. Should I keep my term life insurance policy or invest in a permanent life insurance policy?
Answer: Generally, we are against the idea of permanent life insurance as an ‘investment.’
Permanent life insurance is a blanket term for life insurance that typically offers a death benefit and a savings or investment portion. But this type of policy is expensive since what you are actually doing is paying more than you need into the policy than the insurance company requires for the actual insurance provided (premiums can be $6,000 a year or more). This extra premium is marketed as a way to grow tax-deferred retirement funds that can be accessed “tax-free” through policy loans. Unfortunately, this depends on decades of planned future funding without deviation, along with earnings and cost assumptions that can vary widely from actual experience. And while you may find yourself being sold on the advantages of ‘forced savings,’ the additional mortality costs and potential surrender penalties can cause financial disaster if unexpected financial setbacks result in missed premiums – a risk not faced with other retirement plans.
There are instances in which it can make sense to have permanent life insurance. For instance, if you have a child with special needs who will need lifetime care, a permanent policy can provide him or her with income once you’re gone. However, notice that in this case, the policy is there to protect a risk – something insurance is actually designed to do – and not to be an ‘investment.’
To know if you truly still need any kind of life insurance as you embark on retirement, you need to answer a few questions. These include: Do you still have dependents? What’s your net worth? Will you receive a pension or other payments that would stop if you were to die? How much do you have saved? With all that said, in our experience, most people entering retirement are no longer earning a paycheck, meaning they no longer need an insurance policy to protect their dependents against the potential loss of that income.
Here’s The Simply Money Point: As you enter retirement, chances are you won’t need a life insurance policy. But, to be sure, we suggest working with a financial advisor who is a fiduciary – meaning he or she must make recommendations in your best interest. Don’t get pushed into buying something from a commission-only salesperson.
Steve and Heather from Springdale Township: We finally got rid of all of our credit card debt! Now we’re thinking of only using one card moving forward (we had four before). What should we do with the other accounts? Close them for good?
Answer: First of all, a big congratulations is in order. The two of you have accomplished a marvelous feat, especially considering 43 percent of Americans have been carrying a credit card balance for two or more years according to CNBC. Plus, you’ll now be able to use that money you were previously handing over to the credit card companies every month (and all that interest!) for other financial priorities, such as retirement.
As for the idea of closing your credit card accounts? Three words: don’t do it! Yes, this may seem counterintuitive since you’ve tackled the debt and it sounds like you’re trying to live a more disciplined financial life. But your credit score is calculated using numerous factors, two of which are your length of credit history (older accounts are better) and your credit utilization ratio (the proportion of credit you’re using to the credit you have available).
Simply put, your credit score will suffer if you close your accounts for good – so keep the actual accounts open. After all, the higher your credit score, the more favorable interest rates you’ll get on a future car loan or mortgage. You can still symbolically ‘close’ your accounts by keeping the cards hidden in a drawer or even a safe. Just be sure to keep the accounts active by using your cards once a year to purchase something small (even a $5 coffee will do).
The Simply Money Point is that paying off your credit card debt is a great step towards financial independence. Just don’t shoot yourself in the foot by hurting your credit score in the process.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and his team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email firstname.lastname@example.org.