Meeting About Annuities

Q: I have a scheduled meeting with an agent representing Allianz. Sort of a favor for a friend. I do not like annuity or life products since I had a few years in the insurance business.

Well this fellow says these products are the best thing since the cell phone. What questions do I need to ask him about the product to get a true understanding about what will happen to my money? He was very interested in my IRA investments and said I should... bring all that info with me. Well, indeed I will leave that behind. He is on the big push also that Allianz is offering a 12% bonus for initial and future contributions. I was in the business long enough to see what's happening but I need more info on these products.

I hope you can help.

A: I suggest that you don't go into the meeting 'prepared'. Instead, go in with an open mind and see what the agent has to say. Ask questions and see how the product works.

It's possible that the agent will present the Allianz MasterDex 10. If so, you might consider reading this Special Report I've developed specifically on this product---but wait to read it until after you talk so you can see how your understanding compares to the information in the report.

Let me know if I can be of further help.

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Rolling 401(k) Into Annuity?

Q: My wife recently got a new job, she has some money in her old employer's 401K account. We have talked to an advisor and he recommended rolling this over into a variable annunity with a guaranteed lifetime benefit. The amount will be around 80K. Would we be better moving this into a traditional IRA fund? Or why should I put this into an annuity?

A: I don't think that you should put it into an annuity. Here's a Q&A that I talk about the lifetime benefit:

Underperforming IRA

If that doesn't answer your questions let me know...

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Financial Responsibility for Nursing Home

Q: I am interested to know the financial responsibility my mother will have as she was recently placed in a nursing home due to her inability to live on her own. She live in Ohio, has approx $40,000.00 in CD's, a house valued at $140,000 (paid off), and collects $700/month SSI.

A: Based on her assets, unless she has long term care insurance she will bear the reponsibility for covering the costs. That assumes that you are referring to an assisted-living or nursing home facility for which skilled-nursing care is not provided.

There are some benefits (if I remember correctly) associated with Medicare but I believe that the nursing home benefits only apply for a limited period of time and require a 3 day hospital stay first.

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Roth IRA?

Q: I would like to thank you first of all for making yourself available to answer my financial questions...

I am interested in securing my future as well as my children's future but not quite sure how/what the best way to do it is. I want to begin saving for retirement and start individual saving funds for my children (7 & 4). I considered... the 529 College fund, but thought what if the children decided not to attend college... I spoke with an advisor who suggested that I start a Roth IRA, which would offer me flexibility and even allow me to use it for my children's needs.

I currently have a traditional IRA and am considering rolling over all or part to invest in a Roth. What shall I do?

Additionally, I would like to purchase Long Term Care insurance and/or Universal Life Insurance. I know I am kind of all over the place... please advise what would be best.

A: Unless you have an unlimited income, you should probably prioritize your goals. If you don't have sufficient insurance to take care of your children should you pass away, then that should be your first priority. If you are on a budget then I would recommend term insurance because it will allow you to buy considerably more death benefit than a universal policy. You can even choose one that is convertible to permanent insurance in case you become uninsurable.

Next, you want to make sure that you have an adequate emergency reserve. Most advisors recommend between 3 and 6 months worth of living expense. That money can be kept somewhere safe and liquid such as an online money market account.

If you have any credit card or other non-housing debt that has an interest rate over 6% then you should work on paying that off.

A Roth may make sense as well. I agree with you about a 529 plan.

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Will the Nursing Home Take Mama's House?

Q: Hi! My sister & I are so confused and essentially at a loss here in Alabama. Our 76 year old mother is in ICU with cancer & pneumonia. She's owned her home for more than 20 years - and she paid it off about 15 years ago. I have lived in it for the past 2 1/2 years and have acted as her primary caregiver - I'm 40.

We are looking at nursing homes and are scared they'll take Mama's home... (property value is 89k). She only has about 60k saved up, has Medicare of course, and has Tri-Care for Life (retired military).

What do we do? Hire a lawyer? Is there any place we can get free, personalized advice in Alabama?

I look forward to hearing back from you soon!

A: Does TriCare provide an long-term care benefits?

If not, then she will need to spend down her assets (pay for her own care) before she can qualify for Medicaid. Since someone is living in the home, they may not force the sale but might instead put a lien on it so that when it is sold they can recover up to the amount the spent on her care.

I suggest you call the Medicaid and TriCare offices. They will be able to answer your questions more specifically.

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CD Better Than Annuity?

Q: Mr. Voudrie,

A local banker sold my then-83-year-old Dad a variable annuity with The Hartford insurance company. This was in May of 1999. My Dad is now 91 and we children are looking out for his investments. I personally believe this was an unwise (should I say "stupid"?) move on the banker's part vis a vis my Dad, although a "deal" for the banker. (I am currently talking with the banker.)

The annuity is in the... Advisors Fund with The Hartford and is managed by Wellington, which is a subsidiary of the Vanguard Group. Wellington invests this fund using a 75% equities, 25% bonds strategy (as far as I can determine). The fund has had a fine ride on the market rollercoaster over the years, dipping some $14,000 in value at one point during the October 2002 slide/crash, although enjoying a semi-acceptable upturn in early to mid-October of 2007.

This is a non-qualified annuity. Also, my Dad has never annuitized it, only drawing out a small portion 3-4 years ago. Frankly, I think he would have been better off in a simple and safe CD, money market account or fund, or mutual funds. The annuity's 2-year change is 3.23%. Overall, since purchase, the annuity is doing about 9-and-a-half percent. Sorry to go on so long, but what would your advice be to me and my siblings? Thanks for your time! Enjoy your column!

A: You know that I generally am not a fan of annuities because I don't like the high fees and the long surrender periods. And there is some concern over your father's age when he purchased it. Even then, though, if it was a small portion of his investable assets it may have made sense.

Remember what was going on in the markets back then...

I'm very familiar with Hartford, Wellington management and the Advisors fund. As far as variable annuities are concerned, I would rank this one pretty high. Believe me, he could have done much, much worse.

I also disagree that he would have been better off in CDs over the same time period. Interest rates have been very low the last 6 years. If he was in a one-year CD, he likely would have had years in which he was only earning a couple of percent. Averaging 9 1/2% a year is good, considering the markets.

The death benefit on variable annuities makes them a little more 'friendly' as well. At his death, you and your siblings will receive the current contract value or the death benefit, whichever is higher. You can take it in a lump sum. Taxes will have to be paid on the gains, though.

The real question is what to do now. It sounds like his surrender period is up so there wouldn't be a penalty. If he is concerned about the market and wants to get rid of any fluctuation, then he might consider moving it to a Certificate of Deposit. If he's not too concerned, and this is only a portion of his investable assets, then he may decide to keep it where he is.

One good thing, because of his age he no longer qualifies for an annuity so he doesn't have to worry about agents trying to get him to move his money from one to another.

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Cash Value on Universal Life

Q: I did not see you mention anything in your part 1 or 2 (see Beware of Universal Life Insurance and Beware Universal Life Insurance II) about building up a cash value in your policy when you buy universal life. We know that you can not do that when you buy term and you should mention that there is a way to take advantage of your cash value and never be taxed on it. If you are going to tell them , tell everything.

A: Cash value may build up in a Universal Life policy. And the contract owner has the option... of taking money out of it without having to pay taxes. The reason for that, though, has nothing to do with it being a Universal Life policy. The reason there aren't any taxes is because it is a loan. There's never any tax on a loan regardless of the source.

Moreover, the owner then has to pay interest on the loan. If it was the owners money in the first place why should he/she have to pay interest on it? The reason that there is cash value in the first place is because the amount the owner was paying in premium was much higher than the underlying cost of insurance.

So let me illustrate it this way (making up the numbers). One can buy a 20-year term life insurance policy for $100 a month. That gives us an indication of the underlying cost of insurance. Or he/she can buy a universal life policy for $200 a month. Of course, the cash value in the universal increases---because so much more is being paid in.

Lastly, the money taken out of a universal policy is only tax-free if the policy stays in force until the person dies. It can be transferred to another life insurance policy, but it can't be moved out of life insurance without that loan either having to be repaid or it become taxable.

Doesn't make much sense to me.

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Infinidex 10 Annuity?

Q: What do you think about the infinidex 10 annuity from Alliance.

A: I can't say that I know anything about it, but with any investment (especially an annuity) make sure that you read all of the information, fully understand it, perform your own research and possibly even seek opposing opinions.

I have written a Special Report on the Allianz MasterDex 10 but don't know what similarities it shares with the Infinidex.Reading that report, though, may provide a base of information that you can then use to analyze the Infinidex.

Here is a link to the report:

The Hidden Facts About Equity-Indexed Annuities Revealed!

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Opinion on Fixed Annuities?

Q: How do you answer a world of emails? How do you get paid? I could ask a million questions, but let me give you two.

What do you think of fixed annuities? And how does a poor, undiscipled person... leave enough money to bury themselves without a little ($25K) whole life. They could use up their money on health care?

A: It takes time to answer all of the emails that I receive, but I believe strongly that the individual investor should have someplace that they can turn for help and/or to have a simple financial question answered.

I serve as a money manager to a small group of clients nationwide. That part of my life pays the bills and allows me to answer reader's questions without cost.

My opinion on fixed annuities depends on the type. If you are referring to a fixed annuity where the return is based on a market index, then I generally am opposed to them.

I don't have a problem with the traditional fixed annuity that has a set rate of interest and that interest rate is locked in for the entire period. In those situations, the person knows exactly what they are going to get every year. It makes sense for someone to find ways to pay for their burial expenses.

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Universal Life Fees

Q: Read your articles on universal life insurance with interest, especially since I am right in the midst of making a decision about this topic.

My interest was piqued when I attended a briefing given by a tax advisory group which pitched tax free savings now and tax free money... to your heirs. This was followed by a consultation at their offices where they took me to the something they called cash value life insurance or properly structured maximum tax advantaged universal life policies. I truly was falling for this until the issue of coming up with the money for the premiums of such a policy which would required that I take the money out of my differed vehicles (ie, iras and government thrift accounts), and also my home equity thru a reverse mortgage.

The cost of the reverse mortgage stopped this whole process for me because I could see me paying 15k of closing cost and fees to get 119K loan, then having to pay another 20k for closing cost and fees when I decided to sell the house later.

However, reading your articles raise more questions. Everything being pitched by tax advisory group comes from the recent book written by Douglas Andrews: THE LAST CHANCE MILLIONAIRE. Your thoughts on this would be greatly appreciated.

A: Very familiar with the book and the concepts promoted. And the situation you describe is not unique. Fortunately, you didn't fall for it.

Imagine if you had! Think of all the money you would have lost in fees. And to think that if you ever changed your mind on the insurance you would have lost even more.

This 'tax advisory group' was probably nothing more than a group of insurance agents trying to sound like they were accountants instead of salespeople. Studies have been done that show that people trust their accountant more than they do any other professional.

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Have Annuity Products Improved?

Q: Mr. Voudrie,

Enjoyed your article re. Equity-Indexed annuities ( April 06). I am doing some research and am still very much uncertain of the value of the equity indexed annuity. My background is... financial (CPA) but have had no experience with annuities so am playing catchup and basically have not developed a sufficient understanding of the product to be comfortable with any of it. I hope you have time to briefly respond to my questions listed below.

Some brief facts on our situation.

My wife and I have been retired for about a year and 1/2 and are both 62 years old. I have always been in the stock market with a propensity to be more in stocks than fixed and have done reasonably well. I use a full service broker with UBS and do pay my fair share of fees (1 to 1.5% typically). We currently have a portfolio of about $1M (approx. 700k in IRA's and 300 in after tax moneys), a paid for vacation home (value about $375k), a primary residence with a value of $365 with a $290k mortgage and a rental property we currently are selling that should clear about $200k which we will use to pay down the debt on our home.

I have been very comfortable with my broker and my investment base but Jan (my wife) is much more nervous about the market reminding me every time it dips. As we are looking for a way to be more secure in our retirement, we attended a seminar on annuities and have come away with more questions than answers even after two meetings with these sales reps.

They basically are touting the elimination of almost all risk combined with the ability to obtain earnings close to stock market returns. They stress (a) The ability to be able to tie the Annuity to a stretch IRA, (b) Nursing home protection - the annuity would not be subject to spend down in the case of one of us going into a nursing home, and (c)Most importantly of course, the protection provided against the vagaries of the market (ie a 30-40 % drop in one year that could have a devistating impact on retirement funding).

My specific questions are:

1.If a contract has a floor of 3% - and the S&P goes negative - Does the guarantee typically apply to each year individually or does the floor apply to an average of 3% over the term of the contract such as 10 year. So a good return in some years would eliminate the loss of the year before making the guarantee much less valuable. Your article seems to indicate that.

2.Do you feel a mix of annuities and the market make sense.(From your article it certainly would appear not)

3.What about protection against spend down before the state kicks in for nursing home coverage. (We do have long term care insurance for 3years each or 6yrs for one so this is not a major selling point for me but still a valid point.

4.Do you still believe that the Equity indexed Annuity is as bad as your article or have the products improved?

A: Thanks for your questions. Feel free to give me a call and we can discuss further if you like.

I do not like equity indexed annuities, nor do I see a need for variable annuities. The main reason is that there can be a big difference between how they are sold and how they actually work. And, often, the agents don’t know enough to determine how their annuity compares to those offered by others. So, to liken it to a mutual fund, you aren’t being sold the best mutual fund, you’re often being sold the only mutual fund they offer.

More importantly, would you buy a mutual based solely on it’s objective? Of course not. You would want to look at it’s actual performance to see how the manager has done in the past and if that objective was followed and achieved. This is easy to do with a mutual fund because they are required to report their performance in a standardized manner.

There’s no way to do that with any EIA because they are not required to report actual performance. So you are only going on a hypothetical. You’re only going by how they say it will work. They could be lying through the teeth and there’s nothing you could do about it. Have you gotten a copy of an actual contract, read every word, carefully parsed each statement and fully understand it? Probably not, because they won’t even provide a copy of the contract until AFTER you buy. What’s up with that?

Besides, they can change the internal calculations each year (within limits) and you have no recourse.

There’s little chance that you will get near market returns… you lose 2% right off the bat on the S&P 500 because the EIA doesn’t include dividends.

Here’s the simple analogy that I use that you will easily understand. Let’s say you were going to buy another rental and there was someone interested in partnering with you. The terms were that you would have to put up 100% of the money and the partner would handle all the day to day management. You would share the return, except the partner got to control how much you got each year and to change how that amount was calculated from year to year. If you decided you wanted out of the contract prior to the 10 year period, you would face enormous surrender penalties.

That doesn’t make much sense does it?

Feel free to give me a call.

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In Defense of Annuities

NAFA, the National Association for Fixed Annuities, believes the public is well-served by hearing all voices and opinions on financial choices and products in an objective, balanced, and fair manner. Mr. Voudrie has published many articles on annuities. It is apparent by reading the list of titles that Mr. Voudrie does not believe in the benefits... of fixed annuities. With titles like, "Investment from Hell: Annuities," "Give me a Break," and "Why you Shouldn’t Annuitize," it is clear that Mr. Voudrie does not view these retirement products favorably.

This association is dedicated solely to the promotion of fixed annuities and even with that single-minded purpose, we recognize and value the many other financial products available today. This variety and choice ensures that individuals have a diversified and fluid financial plan. One that can address the numerous and varied objectives for saving and retirement planning. NAFA doesn’t stand against variable annuities, mutual funds or other investment products, we stand FOR fixed annuities. Jeffrey Voudrie is described as a “syndicated columnist” at SeniorJournal.com. It is important to understand that Mr. Voudrie is also “president and owner of Legacy Planning Group Inc, a Private Wealth Management firm in Johnson City, TN that represents select clients. A Financial Services veteran, Mr. Voudrie began his career with Edward Jones in 1987. He later served as a Vice President of First Tennessee Brokerage. He founded his own firm in 2001.”

Mr. Voudrie is a Certified Financial Planner and having held that designation since 1992, I am very familiar with CFP requirements. Certified Financial Planners are bound by the Code of Ethics and Professional Responsibility. There are two principles of the code that are applicable here:

• Principle 2:Objectivity
  
• Principle 4:Fairness
  

The Code states that “Objectivity requires intellectual honesty and impartiality. It is an essential quality for any professional. Regardless of the particular service rendered or the capacity in which a CFP Board designee functions, a CFP Board designee should protect the integrity of his or her work, maintain objectivity, and avoid subordination of his or her judgment that would be in violation of this Code of Ethics.”

The Code also states that “Fairness requires impartiality, intellectual honesty and disclosure of conflict(s) of interest. It involves a subordination of one’s own feelings, prejudices and desires so as to achieve a proper balance of conflicting interests. Fairness is treating others in the same fashion that you would want to be treated and is an essential trait of any professional.”

In the CFP Renewal and Certification program, an outline for INSURANCE PLANNING AND RISK MANAGEMENT has an area on education with a specific section on Annuities and lists over a dozen recommended courses related to annuities. Clearly the College for Financial Planning believes in the importance of annuities and requires ongoing education about them.

NAFA does not believe that fixed annuities are right for all of the people all of the time. Fixed annuities offer the ability to elect an income that cannot be outlived at guaranteed rates sometime in the distant future, the capability to safeguard and insure principal and previously credited returns, and the benefit of accumulating and holding retirement funds in a tax-deferred vehicle that allows the asset to grow more quickly than would otherwise be the case in a similar, but taxable, vehicle.

Even for already-tax-favored funds such as IRA money and pension funds, the additional guarantees and longevity insurance make a strong case for annuities. The variety of withdrawal provisions without penalty and without exposure to loss of principal through market risk –- annual withdrawal amount, death, terminal illness, nursing home confinement, Required Minimum Distributions, and unemployment -- can be advantageous to some consumers.

In addition to tax-deferral, the other significant tax benefit is that interest accumulations do not count in determining whether, and to what level, Social Security provisional benefits will be taxed. This is a significant benefit to customers, and especially middle-class retirees who derive a significant percentage of their income from Social Security not currently consuming all of their assets for living expenses.

And, because an annuity is a contract, it generally passes to heirs through beneficiary provisions rather than through the probate process. For those without a will, this is one way in which assets can be passed to a named beneficiary not subject to the intestacy provisions of the state and without the delays and costs associated with state probate. Since the cost of probating assets for a decedent can be significant, again, especially for middle-class retirees, this is another benefit to a senior wise enough to have some of his or her assets in a fixed deferred annuity.

Fixed annuities are insurance products, and insurance companies are in the unique position of being able to meet the needs of those who are concerned about having their principal exposed to market risk. It is the convergence of those individuals who want safety with the unqualified capability of insurance carriers to provide it -- guaranteed -- that has created this substantial interest in and satisfaction with fixed annuity products.

Choice of products in a financial plan is always a matter for individual determination after an objective and fair presentation of options and alternatives has been offered. Only a well-informed client can make an appropriate decision, and how can one be well-informed with only half the story? NAFA invites individuals seeking balanced information to visit NAFA and read the extensive information available or to link to any one of its member websites by clicking on the MEMBERS tab. All this information is available to the public, and because our association requires neither identification nor any personal contact information, this is an anonymous way to become fully apprised of the complete insurance picture.

Kim O’Brien, CFP Executive Director, NAFA

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Universal Life a Good Move?

Q: About a year ago I cancelled my term life insurance ($300,00 policy for 30 years) because I didn't want to get a new policy after the 30 years and end up paying a lot more due to old age and possible health issues.

I now have universal life in which i pay $26 monthly for a $50, 000 policy.

Did I make a good move?

Do you have any suggestions?

A: You didn’t mention how much the term was costing you. There real question is now much coverage do you need? $50k isn’t much, especially if your life expectancy is over 25 years.

The other question is whether you will need insurance once you are retired…

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Prudential's New Annuity Plan

Q: Have you had a chance to check into Prudential's new annunity plan that is called the "Guaranteed HD Lifetime Five" where it guarantees a minimum of 5% each year or the highest the market gains each year (whichever is highest)?

A: I am familiar with the annuity, there is a tremendous marketing campaign behind it.

But I don’t think it does what you think it does. It doesn’t guarantee a 5% annual return. It guarantees an income stream off of that ‘paper balance’. But if you don’t ever do the income stream, or if you stop it or cancel the policy before death, then the 5% ‘paper balance’ didn’t do anything…what you get back isn’t based on it but on the actual account balance less the withdrawals.

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Guaranteed Death Benefit?

I have read your article on Universal Life and have a question. The policy I own has matured. They want me to accept around $1200 as the net surrender value. I only have 15 days to do this or they will cancel the policy and send me a check for this amount. They failed to inform me that the policy had matured in January 2007. I just received a letter regarding this early this month, October 2007.

They claim I have other options but I do not want to surrender the policy as they are asking me to. Am I still guaranteed the death benefit?

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Using Home Sale Proceeds for College Education

Q: I'm thinking about selling my house in downtown Brooklyn & buying another further in South Brooklyn outright (houses are cheaper there).

I was thinking of using any excess to fund my boys' college education (they're 10 and 6 right now). Is there any way I could maximize the amount set aside for them by avoiding capital gains?

Thank you--and please feel free to send me a brochure of your business.

A: If you are married, you and your wife each have a $250k exemption on the gain from the sale of your primary residence. So that means there wouldn't be any tax on $500k of gain...

Here's a report that will tell more about what I do...

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Getting Proof of Home Sale

Q: Added to the list of the many problems we have had over the last 5 years of taking care of my mother in law, now we are trying to get nursing home medicaid. They just sent a letter stating that they want proof of sale of home in 2004 and proof of what happened to the money. The money was gifted to my husband (her son) How do I prove this?

A: You can show the bank statement with the deposit. But that’s not the issue. The issue is that she can’t gift away assets and then try to qualify for Medicaid within 5 years….

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Is Cash Value of Life Insurance an Asset?

Q: My mother is 76 yrs old, suffering severely from dementia and in need of nursing home care.

She receives Medicare and Medicaid. Her assets are minimal, (no property in her name since 2001, a 1996 Buick regal in fairly good shape, approx $1000.00 in checking, $800.00 monthly social security check and a $10,000 whole life insurance policy with a $3300.00 cash value).

We are in the process of presenting these items to medicaid to qualify her for nursing home care.

My question is, does she have too many assets, with the primary concern being the cash value insurance policy? This policy is being maintained to take care of her "final arrangements" with no intention of cashing out.

I've been told to consider a loan against the policy to reduce the cash value and keep the policy in force.

Thank you in advance for whatever advice you can offer.

A: I am not sure if they count the cash value of the life insurance policy as an asset. One way to find out for sure is to call the Medicaid office and ask them.

Please let me know what you find out.

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Investing in Grandchildren's Future

Q: I would like to take advantage of your offer to answer our question free.

My husband has 7 grandchildren, ages 16-24, and is in the process of purchasing a $10,000 Fidelity Variable Annuity invested in Fidelity Freedom 2030 for each in their own names as their retirement account.

Is this the best way to invest for their future?

Looking forward to your professional advise as this is a timely matter.

A: It would provide tax deferral but wouldn't give them any flexibility of using the funds to pay for college, buy a home, etc. On the other hand, it may be that you are wanting it tied up. If that's the case, this isn't a bad option.

I'm wondering if there are options that could be tax-free...like an educational IRA or a 529. You might want to consider that before you make a final decision.

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How Gifting Affects Medicade

Q: Hello Jeff!

An elderly couple has a home with a mortgage on it and a savings of about $50,000. Because of the spousal impoverishment act one of them is now a medicaid recipient and soon this couple might move into an assisted living situation. If someone is on medicaid or going into medicaid how much can they gift their chidren without tax implication. How far back does the government look... as far as gifting assets to family. Is it better to gift if you can when you have been using the community services and possibly will need to pay back out of the estate (if any left) for the expenses which were covered by medicaid? If the children inherit the house , it seems that medicaid says they will ask for payback on their expenses for that medicaid recipient, how often does that actually happen?

As we get older I certainly will want to transfer some of our assets (if any! Ha Ha!) to my children before I get closer to possible death (I know people live longer and who knows when we are going to die, could be tomorrow!) I heard that the transfer that might be looked at within 5 years prior to death is that correct?

And when there is gifting does the recipient pay taxes on that gift?

A: Medicaid looks back 5 years to see if any gifts have been made. The fact that one is already on Medicaid will also make this more difficult. So there’s probably not much you can do. If the house is sold, the non-Medicaid’s spouses’ portion might be gifted but would then need to wait for 5 years. It doesn’t sound like there would be enough assets to cover the cost of assisted living for a 5-year period.

On gifts, gift taxes are born by the giver, on the sale of the asset the receiver is responsible for income taxes based on the cost basis of the giver.

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Amerus, Indexed Universal Life Insurance

Q: Jeff what are your thought on Amerus, Indexed Universal Life Insurance. I already have a $600,000 term Insurance policy and am considering the indexed policy as it does not end at a specific time, other than death, and what to make sure I leave a guaranteed death benefit for my wife and or children. I am 58 years old. I am maxing out my 401k and have no real debt.

A: The first issue is to verify that you need Universal Life insurance. If you do, I would then recommend finding a no-load version of it where there aren’t any surrender penalties and you have immediate cash value.

In my mind there is a big difference between looking at insurance to protect a risk and looking at it as an investment. For instance, a $600k UL would be pretty expensive and it could be 40 years before it pays out to your heirs. That’s an awfully long time.

If the need isn’t permanent then I prefer term. If you place a high priority on having it even if you live a normal life exectancy, then UL would be the way to go.

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Suggestions for a 35 year old

Q: I have been reading some of your articles online and they have been real eye openers. I am a 35 year old family man... with a decent career. I am pursuing a degree in business while also providing for my family and trying to build a financial future (strong, early retirement).

I recently took a business Mathematics class that put a more positive spin on annuities than your articles. In fact, I was impressed and have trying to learn more about them. They appear more (or just as) powerful than my 401K plan. Though, I see your point and apprehension with them and with the sales people who tout them. As I try to figure out what to do, I rarely get a simple resolution. Everywhere I turn, all the answers on how/where to invest are complex, solicited for more fees/products, or for a large investment. It has gotten to where I am afraid to talk to any financial advisors because I'll be pressured into more fees/products or asked for an investment larger than what I have.

In short, I'm a young guy every-so-often I have $500 - $1,500 to invest in something As everyone, I would like to receive the greatest, safest, possible return (I've read it is very possible to receive 10% apr compounded annually) What is the best investment vehicle? Any direction would greatly help me and many of my friends around the same age with the same question.

A: I understand your frustration. Let me help.

At 35 years of age, and with a family, you should place a high priority on flexibilty. You don’t expect to need the money you plan to invest but there’s no way of knowing what might happen tomorrow. That alone is reason enough to avoid an annuity where you would be subject to an automatic 10% IRS penalty if you accessed it prior to 59 ∏.

Also, you get some tax-deferral with an annuity, but then it gets taxed as ordinary income.

For those reasons, I would recommend that you find a high-quailty no-load mutual fund that will allow you to invest a smaller amount and add to it as you can. Looking out over the next 5-10-20 years, I would lean more toward and international mutual fund because the growth outside the U.S. will probably continue to be higher than the growth in the U.S.

I disagree that 10% annually is very possible. It’s not as easy to do as it used to be, but is possible. The key though is that you want your money to grow at a rate faster than inflation and taxes.

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Safe Keeping for Money from Home Sale

Q: Came across your website this morning. We are closing on the sale of my mother's home today. She was no longer able to afford living there since my father passed away. She will be living with my sister, and has a minimal amount to contribute monthly there,for expenses. She should not have to need this money from the sale unless there is an emergency. However, she has very little in savings. The equity in her home is what she has left. She does receive Soc. Security, and a small pension monthly from my father. Where should this equity check be placed for security? In a CD? In a Mutual Fund? Any suggestions? Thank you in advance.

A: Good question!

Safe from an investment standpoint: Depending on her age and the type of investments she is comfortable with, it may be that a Certificate of Deposit will work best. If she has invested in things like mutual funds and/or the stock market in the past, and if this money can remain invested for 5 years or more, then a portion might be used in a high-quality, no-load mutual fund.

Safety from being used for long term care: This is much more difficult to do. If she's relatively young and in good health, she might check out long term care insurance, possibly using a portion of the equity from the house to cover the annual cost. The other option is for her to gift that money away, but should she do so and apply for Medicaid within 5 years, she would be disqualified.

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Fixed Index Annuities Safe?

Q: I saw your article (Check out articles on annuities). A lady is pitching me on a Fixed Index Annuity fund. Is it safe ? I am 56 yrs old.

A: I am not a fan of Equity Indexed Annuities and many people find that they work much differently than they expected. There’s no such thing as a ‘free’ bonus, you may only receive it if you fulfill all the details of the contract. In this case, it sounds like that can take 15 years.

Personally, I would prefer the Freedom fund where I could retain complete control and flexibility. Then I wouldn’t have to worry about massive surrender penalties if it turned out I didn’t like the annuity or my situation changed and I needed that money.

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Underperforming IRA

Q: I would greatly appreciate some insight on a situation that has made me concerned with my husband's IRA.

Last year he invested in a VA for his IRA due to the fact that the investment company he had it in (which did well for the 20 years he was with them) was not performing as well as in years past.

A: Thank you for your questions. I know that all the options of how to invest an IRA can be confusing. Unfortunately, there is a lot of hype out there and, in my opinion, the financial services industry is great at selling the sizzle and delivering very little steak!

This is especially true... in the area of annuities. You purchased the variable annuity based on the belief that the principal was protected and other guarantees. Often there is a wide gulf between what the investor thinks a product does and what it really ends up doing.

These are complex financial instruments that are sold using generalities. As with anything, the devil is in the details, and the more you know the details the less important some of these guarantees become.

For instance, a principal guarantee on a variable annuity. The ones that I'm familiar with guarantee that you can withdraw so much a year for a certain number of years, thus getting back your principal even if the market goes to zero.

Think about that for a minute. Let's say they allow you to take 7% a year. It would take over 14 years for you to get back your principal. What are the probabilities of the market being worth less over a 14 year period? Very, very small.

Or there are the guaranteed income provisions. Many investors think that these living benefits guarantee that they will earn 5-7% a year regardless of what the market does. They believe that if they leave their money in and 10 years later decide to take it out that they will have earned at least the 5-7% a year.

Nothing could be further from the truth.

These living benefit riders don't apply if you surrender the annuity. They ONLY apply if you take a lifetime income stream from the annuity. Even then, if you ever cash it in, what you get is based on the actual earnings of the annuity less any withdrawals. What you get when you cash it in isn't ever based on the 5-7% guarantee.

Let me explain it this way. Picture two columns on a piece of paper. The first column is the actual value of the annuity from year to year. So if the market goes up, so does that value. If the market goes down, so does that value. There isn't 5-7% added to this column when the market goes down. That column works just like you expect.

The second column is the 5-7% column. This column takes your initial investment and increases it by the 5-7% each year. Some policies take into account 'high water marks', etc., but think of this as the 'benefit' column.

So 10 years down the road you decide to cash in your annuity. You get the value in the first column, the value in the second column meant nothing.

In a different scenario, let's say that 10 years down the road you decide to start taking the income stream of 5%. That income stream is based on the second column. So if the second column was $200,000 your income stream would be $10,000 a year guaranteed for life.

So far so good.

Time has passed and you have been receiving the $10,000 a year. Your situation changes and you need (or want) what's left of the money in the variable annuity. Here's where the surprise happens. What you get isn't based on the value of the second column, what you get is based on the first column less any withdrawals you've made.

Actually, every time you get a payment, they reduce both columns. That payment affects the growth of the first column (as it should).

What if you die? Do you get what's left in the second column? No. Your heirs get what's left in the first column.

There's one other thing to keep in mind. Let's say you give me $100 and I agree to pay you $5 a year. I can pay you that $5 a year for 20 YEARS and all that I've done is given you back the $100 you initially gave me. Keep that in mind when you look at the 'income stream'. There's a big difference between an 'income stream' and a guaranteed 'return'.

That's why I don't place a lot of value on the guaranteed provisions associated with annuities. I expect that few people will ever use them or get the benefits that they expect.

That's why an annuity should first be evaluated based on it's investment potential. These benefits are designed to take your eye off of the underlying investment. The benefits can give an investor a false sense of security thinking that changes in the market won't hurt them. They will.

When evaluated as an investment, I believe that there are many alternatives that are much more attractive and that allow the investor to retain the control, flexibility and access to their money.

For more information, take a look at this Special Report:

Financial Self-Defense

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Equity-Linked CDs

Q: I read your article on Equity based CD's. I am assuming that these are not a qualified way to shelter gains. Any interest earned would be taxable, is that right? If I wanted to pull some money from a qualified 401k and invest in these, I would also be taxed on the 401K withdrawal.

A: There is tremendous flexibility in the way that an IRA is invested. For instance, you can own stocks, bonds, mutual funds, real estate and what are called 'brokered' Certificates of Deposit.

A brokered CD is...
one that is offered by a bank but that can be purchased in a brokerage account. An equity-linked CD works the same way.

So you can't purchase it directly in your 401k, but you can roll money from a 401k to an IRA and purchase the equity-linked CD in that IRA. That way there aren't any taxes and penalties when the money is taken out of the 401k and there aren't any taxes on any earnings associated with the equity-linked CD.

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Distributing Inherited Mutual Fund Shares

Q: I have a question regarding inheritance. I was a beneficiary of my father's Mutual Fund investments (appx $70,000). I want to cash this out and distribute among my other siblings but I want to avoid paying as much taxes as I can and help them avoid paying taxes too. I heard of gifting the money too, would this be an option. Thank you for taking time to read my question.

A: Capital gains taxes are based on the difference between the sales amount and the cost basis. The cost basis is the original investment plus any dividends and capital gains that have been reinvested.

If you inherited the mutual fund... as a result of his death, then it should have received a 'step-up' in basis. That means that your father's basis no longer applies. Instead, it's market value used in filing his estate documents is your cost basis.

So there might not be much gain.

Regardless of whether you give them the money as cash or mutual fund shares it will be considered a gift and subject to the $12,000 a year per person rules. If his estate hasn't been settled, then you can probably accomplish the same thing by 'disclaiming' the portion that you want to go to your siblings. Thus you never 'receive' those shares and it's not considered a gift.

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Alternatives to Annuities?

Q: I am a 73 yr male with a small IRA $300,000 to $315,000 (as the market moves). My distribution is 40% cash, 60% stocks. I need to increase my RMD and do want to erode my principle. I need security for my spouse (52ys) as my small retirement does not have survivor benifits. I read your article on Allianz MasterDex 10 and you convinced me to stay away from annuities. What type portfolio would you suggest?

A: For maximum flexiblity and potential, I would recommend a well-managed, well diversified portfolio.

Here's a Special Report that will help you better understand the industry and what to look for.

Let me know if I can be of further help.

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Equity Linked CDs

Q: If I were to invest in Equity linked CDs, would I become a shareholder in a fund, such as I would in mutual fund investments.

A: No, an ELCD is FDIC insured by the government. You aren't taking any equity risk other than the amount of return.

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How Does Defaulting on a Loan Affect Already Bad Credit?

Q: I filed for bankruptcy 5 years ago and recently I co-signed a loan for my son for a car (I know now that was wrong) and the payments are too much for him and me to handle. If I default on the loan how much will that affect my credit since it is already bad? Can they come after my house?

A: It may depend on whether or not the loan included a personal guarantee--which I imagine it does. That means that all or your assets are subject to their claim as a creditor.

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Life Insurance: Benefit or Investment?

Q: I read your life insurance articles regarding indexed universal life & other types of permanent insurance. (See Beware Of Universal Life II.) You don't seem to think they are a great idea. What would you suggest to the typical consumer who wants to protect his assets yet maximize returns?

A: I guess the first question is whether you are wanting to use life insurance as an investment or for the death benefit? What specific need are you looking for insurance to meet?

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Inheriting a House

Q: First let me say thank you for answering our questions like this. It is a very generous thing you are doing. Thank you.

Our mother died in March of this year and left everything to my sister and I in her will. However, she had only added my sister's name to the deed on her home. When we sell the house my sis is going to split the proceeds equally between us. Since my name was not on the deed at the time of death, how will that affect the amount of taxes I pay?

A: You're welcome.

Since your sister's name is on the deed, she is the owner. She... became a 50% owner when her name was added to the deed. She then received the other 50% as an inheritance.

The 50% that is inheritance gets a step up in basis. That means that the basis on that portion is the fair market value as of the date of death (or 6 months later). So there won't be much tax on that part, if any.

Her cost basis on the 50% she was gifted prior to your mother's death is 50% of your mother's cost basis. That means the amount your mother initially paid for the home plus any improvements.

She will owe capital gains taxes on the difference between the sale price of her 50% and the cost basis.

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Can Annuities Be Accessed by Creditors?

Q: I read your article about annunities but there was one thing you did not address. I understood that they cannot be accessed by any type of creditors, somewhat like a homesteaded home, and would therefore be considered "safe" for certain people - is this correct? I have a $10,000 annunity and was thinking about adding to it and rolling it over to an immediate annunity. Are there annunities that have a "life term" and an "inflation" protection?

A: I believe it is misleading to say that an annuity is protected from creditors. To my knowledge, only an immediate annuity is protected and that's because there isn't any money to go after. You no longer own the asset, only the income stream. And they can go after the income stream.

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Saving Money on Medications

Q: My husband and I have $27,000 coming in yearly. My husband has alzheimers and takes 10mg.of Aricept twice daily plus 10mg of Namenda twice daily plus 40mg. of Benicar for hypertenson. He is enrolled in medicare part D. We get no help from social security because we have too much coming in.

My question is "Is it illegal to order drugs from Canada?" When he gets in the doughnut hole, after about 4 months, his drug bill runs about $486.00 per month. Ordering from Canada would run less than half that. Thanks

A: I believe that it might be illegal but know that lots and lots of seniors are doing it.

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Maximizing Benefits for Social Security

Q: Love the info on your site. One topic I do not see anything about is Social Security and how to maximize benefits. I am a 62 year old widow with a working income of $60,000 + a year. Currently my benefit at full retirement of 66 and my husband's spousal benefit are about the same but I know I can take one and later on change to the other. Is there a strategy here? I plan on continuing to work beyond 66 but less time (pay) or possibly as a consultant to my current employer.

Any ideas?

A: I know that delaying the start of benefits increases both your check and the spousal benefit check. Since you're working, it may make sense to put it off as long as you can.

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