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Term or whole life? What you need to know

May 1, 2012 By Liz Weston

Dear Liz: My mother and her insurance agent swear by whole-life insurance policies. I am 45 and have heard from everyone else to only have term life, which is what my husband and I both have. We have a 15-year-old daughter. Can you please put in layman’s terms what a whole-life policy is and what the benefits are?

Answer: Term insurance provides a death benefit if you die during the “term” of the policy. Term insurance provides coverage for a limited time, such as 10, 20 or 30 years. It has no cash value otherwise and you can’t borrow money against it.

Whole-life policies combine a death benefit with an investment component. The investment component is designed to accumulate value over time that the insured person can withdraw or borrow against. Whole-life policies are often called a type of “permanent” life insurance, since they’re designed to cover you for life rather than just a designated period.

If you need life insurance — and with a daughter who is still a minor, you certainly do — the most important thing is to make sure you buy a big enough policy to cover the financial needs of your dependents. This is where whole-life policies can be problematic, since the same amount of coverage can cost up to 10 times what a term policy would cost. Many people find they can’t afford sufficient coverage if they buy permanent insurance. Also, many people don’t have a need for lifetime insurance coverage. Once your kids are grown and the mortgage is paid off, your survivors may not need the coverage a permanent policy would provide.

If you are interested in a whole-life policy, make sure to run it by a fee-only financial planner who can objectively evaluate the coverage to make sure it’s a good fit for your circumstances.

Filed Under: Insurance, Q&A Tagged With: Insurance, life insurance, term insurance, whole life insurace

Who pays for tax pro’s mistake?

April 23, 2012 By Liz Weston

Dear Liz: Last year I bought an electric vehicle, motivated in part by the $7,500 federal tax credit. I consulted with my tax preparer, a CPA, to ensure I would generate enough income to fully use the one-time, use-it-or-lose-it credit. In December 2011, I informed her of the exact type of that year’s income (earned income, capital gains, dividends, interest and so on) and detailed all my deductions. She assured me that based on those numbers my tax burden was $8,600, more than sufficient to use the credit. It was enough, in fact, that I could use more deductions and losses, so I made some charitable contributions and sold a losing investment. The final numbers were very close to the estimates she received from me in December. Now that she has completed my federal tax return, however, my tax burden turns out to be far less than she estimated. In fact, it’s zero. Ordinarily I’d be delighted, but I specifically consulted with her to ensure I had a large-enough tax burden to use up the credit. I could have sold some winning investments to generate a bigger tax burden, but have now lost that credit forever. So far she has not responded fully to questions about what happened, and I now suspect she may simply have guessed at the tax burden and not run the numbers through any tax preparation software. I feel that she has in effect cost me $7,500. Am I right to be aggrieved and do I have any recourse?

Answer: Of course you’re right to be aggrieved. One of the reasons to hire a tax professional is to get good advice about managing your tax bill.

Human beings make errors, of course. No one is perfect. But it’s disturbing that your CPA hasn’t told you clearly why she made the mistake she did or, apparently, offered any kind of recompense.

When tax pro mistakes cost you money, it’s typically because the preparer underestimated your tax burden and the IRS catches the error. In that case, your tax pro shouldn’t be expected to pay the extra tax, since you would have owed the money anyway if she’d done the return correctly. But many tax preparers will offer to pay any penalties or interest the taxpayer owes because of their errors, said Eva Rosenberg, an enrolled agent who runs the TaxMama.com site.

In this case, of course, your pro overestimated your tax burden, ultimately costing you a valuable credit. You could always ask her to compensate you for some or all of that lost credit. At the very least, she should be willing to refund any fee she charged you for her advice, Rosenberg said.

You may want to review your own behavior to make sure you didn’t contribute to this situation. Given the amount at stake, you should have called to set up a formal appointment in which the two of you could go over the numbers and your previous year’s tax return, if she didn’t prepare it. That would ensure she had enough information to make a reasonable prediction. If instead you called her up with a “quick question” — tax questions are rarely quick, by the way, and the answers almost never are — then you helped set yourself up for a disappointing outcome.

In any case, you should find another tax pro, since this incident — and her handling of it — indicates she’s not quite up to the job of being your advisor.

Filed Under: Q&A, Taxes Tagged With: CPA, tax breaks, tax credit, tax professional, Taxes

Insurance scores aren’t the same as credit scores

April 23, 2012 By Liz Weston

Dear Liz: I have very high credit scores, but recently got a notice from my homeowners insurance company saying that my rates were rising because there had been a number of inquiries on my credit report. The inquiries were as a result of my looking for the best deal on a mortgage refinance, and we applied for a retail card to save the 5% on our purchases. Do many insurers use FICO scores as a rate determiner?

Answer: Insurance companies don’t use FICO scores to set rates, but they do use somewhat similar formulas that incorporate credit report information in a process called “insurance scoring” to set premiums. Insurers, and some independent researchers, have found a strong correlation between negative credit and a person’s likelihood of filing claims. (California and Massachusetts are among the few states that prohibit the practice.)

The formulas insurers use sometimes punish behavior that has only a minor effect on your FICO scores. Since insurers use different insurance scoring formulas, however, you may well find a better deal by shopping around.

Filed Under: Credit Scoring, Insurance, Q&A Tagged With: Credit Scores, credit scoring, FICO, FICO scores, Insurance, insurance scores

Son-in-law badgers elderly couple for money

April 16, 2012 By Liz Weston

Dear Liz: I am 84, and my husband is 88. We have two daughters, the elder of whom is married to a very controlling man. In the past, we lent them money and were paid back. But starting in 2009 his small business began to do poorly. They borrowed nearly $100,000 from us. Then in 2010, he begged us to get a home equity loan on our home, which was paid for.

They now owe us $300,000. We make the home equity payments of $800 a month because they are not able to pay that amount. He said he planned to sell a parcel of land to pay us back. Now he wants to borrow from my individual retirement account. He is telling our daughter to go after us and what to do. So I told my daughter and her husband, no more!

We are so sad. We didn’t expect to have money problems at this age. We wanted our estate to be divided equally between our daughters. But we’re wondering if we should make a new living trust to reflect the debt owed to us. Should we consult a lawyer?

Answer: You absolutely need a lawyer. Not just to draw up a new trust but to stand between you and the financial predator you call a son-in-law.

Badgering people in their 80s for money could be considered a form of elder abuse, and the amount he’s squeezed out of you is horrific. If either of you died or became incapacitated, he could swoop in to clean you out completely.

An elder law attorney can help you protect your finances and figure out what to do about this debt. It certainly would be understandable if you wanted to deduct the money you’re owed from your elder daughter’s inheritance, but you can expect this bully to cause misery regardless of what you decide.

Not that you needed more to worry about, but what you’re calling a home equity loan may well be a home equity line of credit. Although home equity loans come with fixed rates, lines of credit do not — which means the payments that are difficult for you to make now will be more expensive when interest rates rise. In any case, you might want to ask the attorney about the feasibility of a reverse mortgage, which could allow you to pay off the loan without having to make further payments.

You can get referrals to the National Academy of Elder Law Attorneys at http://www.naela.org. If your other daughter is trustworthy, please enlist her help in looking for and speaking with an attorney. She needs to know what’s going on so she can help in your efforts to protect yourselves from this man.

Filed Under: Credit & Debt, Elder Care, Estate planning, Q&A Tagged With: elder abuse, elder law, elderly, family, family loans

Hoard cash if unemployment looms

April 16, 2012 By Liz Weston

Dear Liz: My husband and I have been aggressively paying down our debts and plan to be debt free by this time next year. We’re devoting about 20% of our income to debt repayment and saving about 6% (not much, I know, but we’re young and just starting out). We were building an emergency fund and currently have enough money in it to cover only a few months of our expenses, since we had to dip into it recently for unexpected car repairs.

My husband just lost his job. I make enough that we would just barely be able to cover all of our minimum payments and our bills, but my employer lost its biggest client and I may be out of a job soon too. Should we continue to make the same debt payments, reduce the amount or make only minimum payments until we are both securely employed?

Answer: As soon as you know that unemployment is a possibility, you should begin to conserve cash. That means making only the minimum payments on your debt and cutting your expenses to the bone. Although the job picture is improving, the average duration of unemployment is still close to 40 weeks. That’s a long time to go without a paycheck.

When you’re both employed again, you should reconsider your financial priorities. Getting out of debt is a great goal, but not all debt is created equal. Paying off credit cards should typically be a high priority, but you needn’t be in as much of a rush to pay off federal student loans, car loans or mortgages, because the rates on these debts is typically fixed and relatively low. Instead, make sure you’re taking advantage of retirement savings opportunities and building up a cash cushion to tide you through the next financial setback.

Filed Under: Budgeting, Credit & Debt, Q&A Tagged With: debt, Debts, financial priorities, unemployment

Reluctant lender blocks quick foreclosure solution

April 9, 2012 By Liz Weston

Dear Liz: Is there any way to expedite the foreclosure process? My wife bought a townhome shortly before we were married. Long story short, it didn’t fit our family once we got married and had a baby. We bought a larger house and tried renting the townhome but couldn’t cover the mortgage payment. We attempted a short sale, but the bank refused a good offer, so we let it go into default. We even offered to do a deed in lieu of foreclosure, but the bank refused unless we provided financial information for me, too. Since I’m not named on the mortgage and wasn’t even around when she got the loan, I refused. We’ve mentally and financially prepared for foreclosure and now just want the process complete. The bank, though, doesn’t seem to be in any kind of hurry. The process is now entering the third year with no action on their part, and we haven’t even been to the property in well over a year. We’ve told them expressly that we aren’t fighting them on the foreclosure. At this point we just want to move on.

Answer: Offering a deed in lieu of foreclosure — in which your wife hands over the keys in return for being released from the loan — was probably your best bet to speed things along. If you don’t want to provide the financial information the mortgage company is requesting, you’re stuck with waiting this out.

It’s unfortunate, because many lenders prefer deeds in lieu as a cheaper, faster way to get control of properties they’re going to wind up with anyway. The idea is that the homes probably will be in better condition than if an angry borrower or squatter trashes them, plus the costs of formal foreclosures are avoided. As foreclosure times have lengthened, some lenders have even sent out letters to underwater homeowners in default urging them to consider a deed in lieu transfer.

One thing you should investigate is whether the lender can come after your wife for a “deficiency judgment.” If it is allowed in your state, your wife could be liable for any leftover debt that isn’t paid off with a foreclosure sale. Talk to an attorney familiar with credit and foreclosure laws in your state.

Filed Under: Q&A, Real Estate Tagged With: deed-in-lieu, foreclosure, foreclosures

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