Q&A: Term life insurance

Dear Liz: My husband doesn’t qualify for term life insurance because he is overweight and pre-diabetic. Although he’s working on getting in shape, I’m afraid something might happen. I should add we have a 3-year-old daughter, and he is the main breadwinner.

What would you suggest we do to ensure we are covered if something were to happen?

Answer: Just because your husband was turned down by one insurer doesn’t mean others won’t accept him. Even people who are obese or who have diabetes can find coverage, so your husband shouldn’t accept that he’s uninsurable.

Look for an independent agent or broker who works with several companies rather than a captive agent who works for just one or two. A fee-only financial planner may be able to help you find a good agent. The planner also could recommend an appropriate amount of coverage.

Your husband also should investigate any coverage he might have through his job. Many employers provide a base amount of coverage as a benefit (frequently $50,000 or one year’s pay) and often allow workers to buy additional coverage without requiring medical exams.

The downside of employer-sponsored group life insurance is that he may not be able to buy as much coverage as he needs. He may need 10 times his annual salary, for instance, but his group policy may max out at five times his salary. Also, the policy may not be portable — it may end if he’s laid off or quits, for example.

The best strategy will depend on the costs he faces. But one approach may be to buy as much employer-provided coverage as possible and supplement it with an individual term policy purchased on his own.

If his health improves, he could boost his individual coverage while buying less of the employer-provided kind.

Q&A: Surviving on Social Security Disability

Dear Liz: I’ve been on disability for over 10 years, and I currently receive $1,527 a month in Social Security Disability Insurance. My rent starting in March will be $1,400. I’m not opposed to moving, but after checking literally thousands of listings, I found that what I’m paying is not unusual for my area. I’m living on savings now. I’d like to have a job but am hard-pressed to find work. What should I do?

Answer: You don’t have to do anything if you have enough savings to last the rest of your life. Assuming that’s not the case, you need to do something to dramatically lower your cost of living.

You may qualify for housing assistance. You can use federal government sites such as Benefits.gov or HUD.gov to explore your options, or search for the name of your community and “rental assistance programs.”

You may discover that your low income is still too high for the available programs or that there’s a massive waiting list. If that’s the case, you still have options.
If your disabilities allow, you could earn low or even free rent by working as an apartment manager, a companion to an elderly person, a babysitter for a family with young children or a caretaker for a home or estate.

If your apartment is in a desirable area, you may be able to rent it out a few days a month on Airbnb, Homeaway or another vacation rental site to offset your cost. (Check with your landlord first.)

You could look for a roommate or other shared housing in your community, or consider moving to a less expensive area. You may need to move only a few miles to find a more affordable place, or you may have to consider transferring to a different city or state.

If you’re willing to be truly mobile, you could do what some retirees on limited incomes do and live full-time in a recreational vehicle. Some get jobs as camp hosts or other campground workers in exchange for a free site.

In general, you shouldn’t pay more than about 30% of your gross income for housing. Limiting your rent to 25% is even better, since it will give you more wiggle room to afford the rest of your life.

Q&A: Social Security disability insurance and survivor benefits

Dear Liz: My first wife died six years ago at age 60. I was 52 and we had been married 27 years. My wife was on Social Security disability for 15 years before her death. My only dealing with Social Security after her death was to cancel her payments. I received no benefits of any kind. I am now remarried. Were there any Social Security benefits that I failed to request? Is there any effect on my future retirement?

Answer: You may have been eligible for a one-time payment of $255, but that’s likely all.

We’ll assume your wife was receiving Social Security Disability Insurance payments, which are disability checks paid to workers who have enough work credits in the Social Security system. SSDI is different from Supplemental Security Income, or SSI, a need-based federal program for low-income individuals who are disabled, blind or over the age of 65. Survivor benefits aren’t available under SSI, but they are under SSDI.

The rules for SSDI survivor benefits are similar to those under regular Social Security. Survivor benefits typically are available starting at age 60. Survivors who are disabled can begin receiving the benefits starting at 50, and survivors at any age can qualify if they’re caring for the deceased person’s child who is under 16. When you remarry before age 60, you can’t claim survivor benefits based on your first wife’s Social Security record unless the subsequent marriage ends in death or divorce.

Q&A: Terminating private mortgage insurance

Dear Liz: I bought my first home about a year ago. Because I had very little money for the down payment, I have to pay private mortgage insurance, which is a whopping $385 each month. My burning question about this is: How can I get rid of it? There must be a way to pay the loan quicker or pay more each month or something to make it go away.

Answer: Mortgage insurance protects the lender in case you default on your loan. Since loans with small down payments have a higher risk of default, mortgage insurance is typically required until your balance falls to 80% of the original value of your home. At that point, you can request in writing that the mortgage insurance be canceled. If you don’t make the request, the lender is still typically required to terminate PMI when your balance reaches 78% of the home’s original value.

To speed that day, you can pay down your principal, but do it the right way. Call your mortgage servicer and ask how to be sure the extra money you submit is reducing your mortgage balance. Otherwise, your extra money may just be applied to the next month’s payment, which won’t help reduce your balance much.

Q&A: VA health coverage and the Affordable Care Act

Dear Liz: My brother is a Vietnam veteran. Every month since his separation from the Navy in 1969, he has had a monthly premium deducted from his pay and sent to the Veterans Administration for his medical insurance coverage. Last month he received a notice from his employer stating that if he doesn’t sign up and pay premiums under the Affordable Care Act, he will be fined for not having medical insurance. How can this be? He goes to the VA for all of his medical needs. Can this truly be correct?

Answer: People enrolled in VA healthcare don’t have to sign up for additional health insurance or pay additional premiums. Their VA coverage meets the Affordable Care Act’s requirements for coverage.
Your brother’s employer may have sent out a general notice to all employees about the law, rather than one that reflects his individual situation. If the employer believes that VA coverage doesn’t qualify, it should be alerted to this page on the VA site: http://www.va.gov/health/aca/.

Q&A: The effects of a property sale on Social Security

Dear Liz: I sold a rental property this year and will have a long-term capital gain of about $100,000. My normal income usually puts me in the 10% tax bracket and my Social Security is not taxed because my total income is under $25,000. I pay $104 per month for Medicare. Will the sale of the rental property count as income and make my Social Security benefits taxable? Will I suddenly be deemed “rich” enough to pay more in Medicare payments? If so, will the Medicare payments go back to normal because I will have total earnings under $25,000 after 2014? I am 66, single and by no means rich.

Answer: This windfall will affect your Social Security taxes and your Medicare premiums, but the changes aren’t permanent.

The capital gain will be included in the calculation that determines whether and how much of your Social Security checks will be taxed, said Mark Luscombe, principal analyst for CCH Tax & Accounting North America. That will likely cause up to 85% of your Social Security benefit in 2014 to be taxable.

Your Medicare premiums are also likely to rise based on your higher modified adjusted gross income, said Jay Nawrocki, senior healthcare law analyst for Wolters Kluwer Law & Business. The income used to determine Medicare premiums is the modified adjusted gross income from two years earlier, so your premiums shouldn’t increase until 2016. If your income reverts to normal in 2015, your premiums should also revert to normal in 2017, Nawrocki said.

The exact amount you’ll pay can’t be predicted, but people with modified adjusted gross incomes under $85,000 paid $104.90 per month in 2014. Those with MAGI of $85,000 to $107,000 paid $146.90, while those with MAGI of $107,000 to $160,000 paid $209.80. If your income for 2014 puts you in that last group, you should count on your premiums roughly doubling in 2016.
There is some good news. You’ll qualify for the 0% capital gains rate on the portion of the gain that makes up the difference between your income and the top of the 15% tax bracket (which is $36,900 in 2014 for a single person). If your income is $24,000, for example, then $12,900 of your capital gain wouldn’t be taxed by the federal government. The remaining $87,100 would be subject to the 15% federal capital gains rate. You may owe state and local taxes as well, so consult a tax pro.

Q&A: Maximizing retirement benefits

Dear Liz: I don’t know where to turn. My husband is 76. He has a federal government pension and collects Social Security but he has only a $17,000 life insurance policy. We still have a $229,000 mortgage and no savings other than my small 401(k). I am 59 and also a federal worker. Do you have any suggestions or guidance for me? Is there such a thing as an insurance policy that could pay off the mortgage if he passes before me?

Answer: Buying a life insurance policy on your husband that would pay off your mortgage isn’t necessarily impossible, but it would be expensive and might not be the best use of your funds. You can explore that option, of course, but you also should research your own retirement resources and what’s likely to remain after he’s gone.

Will your husband’s pension make payments to his survivor or will it end when he dies? How much will your own federal pension pay you when you retire? How much will Social Security pay you, and how does that compare with your survivor’s benefit (which is essentially equal to what your husband is receiving when he dies)? What are your options for maximizing those benefits?

You also need to know if your Social Security benefits could be reduced because of your public pensions. Some federal employees and employees of state or local governments receive pensions based on earnings that were not subject to Social Security taxes. When that’s the case, their benefits could be reduced by the Windfall Elimination Provision or the Government Pension Offset. Most federal employees hired after 1983 are covered by Social Security, but just in case you should check out the information at http://www.ssa.gov/gpo-wep/.

Once you have an idea of your income as a widow, you can compare that with your expected expenses and see whether continuing to pay your mortgage will pose a burden. If that’s the case, you might consider downsizing now to a place you could afford to buy with cash or a much smaller mortgage. Reducing your expenses also could help you build up that 401(k), which will help provide you with a more comfortable retirement.

Establishing a relationship with a fee-only planner now will help you prepare for the future and give you someone to turn to for financial advice should you be left on your own.

Should you hide assets to get more financial aid?

Dear Liz: We have a son who is a high school junior and who is planning on going to college. We met with a college financial planner who suggest we put money in a whole life insurance policy as a way to help get more financial aid. Is that a good idea?

Answer: Your “college financial planner” is actually an insurance salesperson who hopes to make a big commission by talking you into an expensive policy you probably don’t need.

The salesperson is correct that buying a cash-value life insurance policy is one way to hide assets from college financial planning formulas. Some would question the ethics of trying to look poorer to get more aid, but the bottom line is that for most families, there are better ways to get an affordable education.

First, you should understand that assets owned by parents get favorable treatment in financial aid formulas. Some assets, such as retirement accounts and home equity, aren’t counted at all by the Free Application for Federal Student Aid or FAFSA. Parents also get to exempt a certain amount of assets based on their age. The closer the parents are to retirement, the greater the amount of non-retirement assets they’re able to shield.

Consider using the “expected family contribution calculator” at FinAid.org and the net cost calculators posted on the Web sites of the colleges your son is considering. Do the calculations with and without the money you’re trying to hide to see what difference the money really makes.

Most families don’t have enough “countable” assets to worry about their effect on financial aid formulas, said college aid expert Lynn O’Shaughnessy, author of “The College Solution.” Those that do have substantial assets have several options to reduce their potential impact, including spending down any custodial accounts, paying off debt and maxing out retirement plan contributions in the years before applying for college.

Another thing to consider is that most financial aid these days comes as loans that need to be repaid, rather than as scholarships or grants that don’t. So boosting your financial aid eligibility could just mean getting into more debt.

Meanwhile, it’s generally not a good idea to buy life insurance if you don’t need life insurance. The policy could wind up costing you a lot more than you’d save on financial aid.

If you’re still considering this policy, run the scheme past a fee-only financial planner—one who doesn’t stand to benefit financially from the investment—for an objective second opinion.

No spouse, no kids. Time to cancel life insurance?

Dear Liz: I am 43 and divorced. I have a mortgage and an auto payment. I fully fund my 401(k) each year and am funding a Roth IRA. I also have emergency savings of $30,000 and a term life insurance policy for $350,000. What I don’t have is children or a spouse. I am thinking of canceling the policy, but is this a good idea?

Answer: The most important question to answer about life insurance is whether you need it. If no one is financially dependent on you, the answer is probably no.

Then again, canceling your policy is a bet that your life isn’t going to change — that you won’t someday have a partner who may need your income to pay the mortgage or other expenses, for example. If you’ve canceled your policy, you may find it difficult — not to mention more expensive — to get similar coverage later.

Term insurance is typically fairly cheap. Current quotes for a $350,000 30-year level term policy for a woman your age are typically between $40 and $60 a month. You’ll have to weigh whether the savings is worth what you’d be giving up.

Should life insurance be renewed in retirement?

Dear Liz: My life insurance policy of $500,000 will end in four years, when I’m 63. My wife’s policy ends at age 62. Our kids are 28 and 25 and successfully launched with careers. I also have a $180,000 life insurance policy through my job that expires when I plan to retire, also at age 63. My wife and I have long-term-care insurance policies. We have $170,000 in an active investment account plus $1.4 million in our 401(k)s. Our kids also have trust funds that they will get when they turn 30 of about $80,000 each. Should I buy more life insurance for 10 to 15 years? Our estate, which is in a living trust, will pass to the kids. Our house is worth about $1 million.

Answer: The first question you must ask when it comes to life insurance is whether you need it. If you have people who are financially dependent on you, you typically do. If your wife has sufficient retirement income should you die, and vice versa, then you probably don’t.

So-called permanent or cash-value life insurance is often sold as a way to pay estate taxes, but again, it doesn’t look as if you’ll need that coverage. Congress increased the estate tax exemption limit for 2012 to $5.12 million, and that amount is tied to inflation going forward.

Still, this is a good question to pose to a fee-only financial planner, and you should be seeing one for a consultation before you retire in any case. Retirement involves too many complicated, irreversible decisions to proceed without help.