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.
Today’s top story: How life insurance can affect your estate taxes. Also in the news: Money tips for new workers, 401(k) tips for when you quit your job, and important money lessons for kids under 5.
Today’s top story: How to tackle private student loans. Also in the news: Re-evaluating your life insurance needs, a potentially embarrassing new way to pay with a credit card, and ten retirement saving strategies you should know about.
Today’s top story: The most embarrassing money topics. Also in the news: How to make a life insurance claim, seven signs you have bad credit, and the insurance questions you should ask when buying a car.
