Don’t buy life insurance if you don’t need life insurance

Dear Liz: I recently inherited around $200,000. I’m on track for retirement, so my broker is encouraging me to consider buying a policy for long-term care. He recommends a flexible-premium universal life insurance policy that requires a one-time upfront payment and provides a death benefit as well as a long-term care benefit. It does appear to me to be a better option than buying a long-term care policy in which I pay a certain amount every month, which can of course increase greatly as time goes on, with no guarantee of ever needing or using the benefits and no hope of money paid in becoming part of my estate.

Answer: Long-term care policies can indeed be problematic, since the premiums can soar just when you’re most likely to need the coverage. So if you need life insurance for another purpose — to take care of financial dependents should you die or to pay taxes on your estate — then a life insurance policy with a long-term care rider may not be a bad idea, said Laura Tarbox, a fee-only Certified Financial Planner in Newport Beach who specializes in insurance.

But buying life insurance when you don’t need it just to get another benefit, such as long-term care coverage or tax-free income, is often a costly mistake.

“The golden rule is that you do not buy life insurance if you don’t need life insurance,” Tarbox said. “It would probably be better to invest the money and have it earmarked for long-term care.”

If you decide you want to buy this insurance, don’t grab the first policy you’re offered. Shop around, because premiums and benefits vary enormously. The financial strength of the insurer matters as well. You want the company to still be there, perhaps decades in the future, if you should need the coverage.

What you don’t want to do is take guidance solely from someone who is going to make a fat commission should you buy what he or she recommends.

“Get two or three proposals from different agents,” Tarbox said. “A fee-only financial planner can help you sort through them.”

Prepaid cards aren’t a great choice for travel

Dear Liz: I have been granted a Chapter 7 bankruptcy discharge of all my debts. I’m now debt free and plan to stay that way. I’ve been saving like crazy and have enough to afford a cross-country driving trip to attend my son’s wedding. I’d like your advice on using prepaid debit cards to cover expenses such as fuel, food and lodging. My plan is to load each of three cards with an amount of money to cover each category of expense, based on my best research estimates, as a means of controlling how much I spend. If you feel this is a good plan, which would be the best brand of card to use?

Answer: Your determination to stay out of debt is admirable, but prepaid cards are problematic. You don’t have the same federally mandated consumer protections you have with a debit or a credit card, so merchant disputes or a lost or stolen card can wind up costing you big time.

Furthermore, these cards can be expensive. You often pay to activate the card, to load it with cash and to access the cash in transactions. Card comparison site NerdWallet.com studied 40 popular prepaid debit cards and found that the average card cost nearly $300 annually in basic fees. Monthly fees of up to $14.95 took the biggest toll, but $1 to $2 fees per transaction and for ATM use could easily cost a typical user more than $20 a month.

If you’re convinced prepaid cards are the best money-management tool for your situation, though, you might want to choose the American Express Bluebird, which was dramatically less expensive than its competitors in the NerdWallet study. The Amex card charges no monthly or per-transaction fees and allows for direct deposit. ATM withdrawals cost $2 apiece and cash reloads are just a buck, compared with an average of $4.50 with other cards.

Eventually you may want to look into getting a secured credit card to help you rebuild your credit scores, since prepaid cards won’t help with that. A secured card is one in which you make a deposit at the issuing bank, usually between $200 and $1,000, and get a card with credit limit equal to your deposit. You don’t need to carry a balance on these cards, but you do need to have and use credit if you want to rehabilitate your battered credit. NerdWallet recommends the secured cards issued by Orchard Bank and Capital One.

Try, try again

One of the most frustrating things about money is that progress may not be permanent.

But it’s still progress—if you keep going.

Here’s what I mean. Say you make a goal to boost your emergency fund. You manage to save a few hundred bucks—and then your car breaks down, or you get a speeding ticket, or you need dental work. There goes the extra money.

That’s where a lot of people give up. Looked at another way, though, the emergency fund did exactly what it was supposed to: it was there when you needed it, and kept you from putting another few hundred bucks on your credit cards. If you keep saving, this small start can turn into something bigger.

In my MSN column, “Why you need $500 in the bank,” I told the story of Wendi Pendleton. Here’s the email she sent me a couple of years ago:

“I just wanted to thank you. During April 2008 I read a column about having a $500 emergency fund. I decided it was solid advice and trimmed my spending that month and saved $500. Realizing how much money I wasted I saved another $500 the next month and so on (and some months more than $500). Even after what would have been a crisis with dental work needed, and a car repair that would have stressed me before, I now have $12,000 in savings I am using as a down payment on my first house, something I never thought would be possible for me on my own. Thank you, you changed the way I looked at my money and spending and improved the quality of my life.”

My challenge right now isn’t saving money—we’re on track with that. My goals involve getting more exercise. The days I don’t get in a full hour’s workout can be discouraging, but my experience with achieving other goals has taught me that any exercise is better than none. When I hit a setback, like my recent bout with the flu, the important thing is not to throw my hands up in despair and retreat to the couch. The important thing is to get back out there, and try again.

I hope you’re making progress on your goals for 2012, including your goals with money. If not, well, maybe it’s time to get off the couch.

This post is a part of Women’s Money Week 2012. For more posts about goals and taking action, see Women’s Money Week.

Use windfall to pay down debt, boost savings

Dear Liz: I am closing a business deal that will net me just under $1 million. I have an interest-only loan on my home, two car loans and credit-card debt. My plan was to “clear the plate” and pay everything off, leaving me about $175,000. I am not worried about getting into further debt, as my wife and I are pretty grounded, but I wonder if I should be giving up the tax break of a mortgage. My wife and I make a fair income, so we will need advice on investment options as well.

Answer: You say you and your wife are “pretty grounded,” yet you carry a huge amount of debt, including a ticking time bomb of a mortgage.

Interest-only loans were quite fashionable in the boom years but make little sense for most people. That’s because the low initial payments ultimately reset much higher, as the interest-only period ends and the borrower must begin repaying principle.

Carrying credit-card debt is foolish as well, and a sign that you’re living beyond your apparently quite comfortable means.

Furthermore, you don’t say anything about your assets — whether you’re on track saving for retirement or if you have an adequate emergency fund. That would make a difference in how you should deploy this windfall. If your savings are inadequate, it would make sense to invest a good chunk of this money, even if it meant continuing to carry a mortgage. If you must have a home loan, though, it should be a traditional, fixed-rate version to avoid future payment shock.

The big danger is that you’ll pay off what you owe now, only to wind up deeper in debt in a few years because you haven’t changed your approach to money. Use some of your windfall to hire a fee-only (not fee-based) financial planner to review your situation. You can get referrals from the National Assn. of Personal Financial Advisors (www.napfa.org).

How to stop collection calls

Dear Liz: About six months ago a debt collection agency started contacting me, by phone and the occasional letter, claiming that I have a past debt of about $20,000 that I owe to a bank card. I have never heard of this particular card or bank. I keep very accurate files, and I do not see this in my records. My credit scores hover around 720 to 740. How can I get them to stop contacting me?

Answer: If you don’t owe this money, send the collector a letter by certified mail, return receipt requested, stating that the debt isn’t yours and that you don’t want to be contacted again. It’s not unusual for a collection agency to dun the wrong person, and this may not be the end of it. Often, these poorly documented debts are resold, so you may have to tell the next collection agency the same thing.

If you did owe the money, you would want to tread more carefully. A collection agency would still have to honor a “do not contact me” letter, but sometimes these letters prompt the collectors to file lawsuits against debtors, said Gerri Detweiler, a credit expert with DebtCollectionAnswers.com. The collection agencies figure if they can’t negotiate payments with a borrower directly, they’ll use the court system to get the debtor to pay.