Ask Liz Weston

Get smart with your money

Retirement

Q&A: The pros and cons of converting life insurance to an annuity

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Dear Liz: I have a life insurance policy that is worth $16,000 if I cash out. Our agent says if we convert this to an annuity, we would eliminate our monthly fee of $25. The policy is worth $35,000 if I should die with it still in effect. We purchased this only for the purpose to have me buried. Is converting this to an annuity a better option?

Answer: Possibly, but you’ll want to shop around to find the best one rather than just accepting whatever rate your current insurer offers. You can compare offers at www.immediateannuities.com.

Converting to an annuity through what’s known as a 1035 exchange means you’re giving up the death benefit offered by your current policy for a stream of payments that typically last the rest of your life. You don’t pay taxes on this conversion, but taxes will be due on a portion of each withdrawal to reflect your gains.

If you cash out, you’ll get money faster — in a lump sum — but will owe taxes on any gains above what you’ve paid in premiums.

The face value of your policy is far beyond the median cost of a funeral and burial, which the National Funeral Directors Assn. said was $7,181. Before you dispose of the policy, though, you should make sure your survivors will have other resources to pay that cost and that they won’t otherwise need the money.

Q&A: Social Security divorced spousal benefits

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Dear Liz: A friend was told by Social Security that she could not collect spousal benefits on her ex-husband’s work record because she did not have his Social Security number. How can I help her find it?

Answer: Your friend may have run into a new Social Security employee, or at least one who is not well-informed. Social Security says on its website that people who qualify for divorced spousal benefits do not need their exes’ Social Security number as long as they can provide enough identifying information for the agency to locate his record. She does need to have a marriage certificate and divorce decree along with her own birth certificate.

To qualify for divorced spousal benefits, the marriage must have lasted 10 years and your friend must currently be unmarried

Q&A: Taking Social Security at 70

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Dear Liz: My husband will be turning 70 in August. Must he start taking Social Security at 70 or can he wait a little longer? He will still be earning money and if I understand correctly that will lower the amount he will receive. Does he have to do anything like apply for it or do they know he is turning 70?

Answer: He should apply for retirement benefits — online at www.ssa.gov, in person at a local office or by calling 800-772-1213 — three months before he turns 70. Benefits max out at that age, so there’s no reason to delay any longer.

The earnings test you fear only affects people who start benefits before their full retirement ages, which for your husband was 66. When you start benefits early, Social Security deducts $1 for every $2 you earn over a certain amount ($15,720 in 2016). After full retirement age, that penalty disappears.

Q&A: Taking Social Security early

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Dear Liz: My wife will be 62 in November and does not work. I am 55 and have a 401(k) for our retirement. I know you preach waiting to take Social Security. But what about if my wife takes it early and we invest all of the money? Would it then make sense to take early?

Answer: You would need to get returns well in excess of 7% to beat the guaranteed annual return you get from waiting to take Social Security. In today’s volatile markets, that would be quite a feat.

You can run the numbers yourself at a Social Security claiming calculator. AARP offers a free one, or you can pay $40 to use one of the more sophisticated options such as MaximizeMySocialSecurity.com.

Q&A: Social Security survivor’s benefits

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Dear Liz: I became a widow in my 40s. My children collected Social Security until reaching age 18. At age 60, I started collecting survivor’s benefits. Now that I’m 65, do I need to do anything to collect my late husband’s full Social Security amount at age 66?

Answer: Starting early means you won’t get his full Social Security benefit.

Survivor’s benefits are based on what your husband would have received at his full retirement age if he hadn’t started benefits when he died, or what he actually received if he had started benefits.

His benefit was reduced to reflect your early start, however. Only by starting at your own full retirement age of 66 would you have received 100% of his benefit.

Starting early with survivor’s benefits can be a good option if you had a solid work history and your own benefit eventually will be larger than the survivor’s benefit. If that’s the case, you can leave your own benefit to grow until it maxes out at age 70 while still receiving Social Security checks. If your own benefit won’t be larger, though, it may have been smarter to wait.

Q&A: Social Security survivor benefits

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Dear Liz: I am 63 and retired but have not started to collect my Social Security. My husband will be 67 in March. He started his Social Security at 62. Our plan is to wait until I am 70 to start my benefit, which would make my monthly amount significantly larger than his. If I predecease my husband, would he be able to collect my benefit instead of his own? If I started benefits now, our checks would be relatively close in size, although mine would be a bit higher than his current amount.

Answer: If you had started benefits already, your husband’s survivor benefit would equal what you were receiving when you died. Since you didn’t start early, though, your husband will get more.

If you should die before your full retirement age of 66 without starting retirement benefits, he would receive a survivor benefit equal to what you would have received at 66.

If you continue to delay benefits past age 66, your retirement — and thus his survivor benefit — would accrue the “delayed retirement credits” that boost your Social Security check by 8% annually between age 66 and age 70, when your benefit maxes out. In other words, if you die between 66 and 70 without starting benefits, he would get the delayed retirement credits and larger check you’d earned even if your checks hadn’t started.

As you can see, delaying the start of benefits is a great way to maximize what a survivor receives. It’s particularly important for the higher earner in a couple to put off filing for retirement benefits for as long as possible.