Marketplace

Savings and Health

Question: I just finished graduate school and started my first real, full time job. I want to begin contributing towards retirement. My situation isn't as simple as many people my age, as I'm a 30-year old with several chronic health conditions. I'm currently able to work, but a downturn in any of my conditions could change that ability. I have two main concerns:

1) Contributing to a retirement account and then needing the money due to a reduced income due to my disability and having to pay an early withdrawal penalty.

2) I have no idea how much to contribute for retirement health insurance costs, or such costs if I have to retire prior to 65 (before I qualify for Medicare). I'm currently in such a high risk insurance category that it would be several thousand dollars per month IF any insurance company would insure me.

I'm unable to find any information on the web and doubt many retirement advisors deal with this type of concern. Thank you! Dawn

Answer: A lot depends on the income you're earning, of course. But let's start with retirement savings. Take full advantage of a 401(k), 403(b), or similar retirement savings plan at work if it offers a company match. When you look at the performance of a retirement savings plan at work, much of the gain comes from the company match. (And you can draw on that money after age 59 ½ without penalty if you need to pay for medical expenses before Medicare kicks in at age 65.)

You could use the rest of your savings money to open a Roth-IRA. Roth contributions are paid with after-tax dollars, so there's an upfront tax hit, but any gain from your investments is tax free. Contributions to a Roth can be a maximum of $4,000 a year; $5,000 if you're over 50.

But the real advantage for someone with your circumstances is that the Roth is both a retirement savings plan and a store of emergency savings. In an emergency, you can take out money from your Roth contributions without paying or taxes on it. You leave the investment gain in the portfolio alone.

Here's a hypothetical example: Let's say in 2005 you put $2,000 into a Roth, and in 2008 you need $1,000 to pay medical bills--and there is no other pot of savings. You could take out $1,000 from your Roth and not pay a 10% penalty or taxes to Uncle Sam on the withdrawal. Of course, the main drawback to this strategy is that you will earn less on your Roth savings. But sometimes that's a price worth paying.

Two quick thoughts on the healthcare front. If I were you, I would focus my job search and employment goals on employers who offer a good healthcare plan. In most cases, that means finding a government job, or working for a large national or multinational corporation. I don't how much you'll need to set aside for healthcare when you get older. By then, we could have universal health insurance--or not. My main message is that you have to save more than the average person to build up a financial cushion. And A Roth is one way to accomplish that goal.

02/12/08 by Chris Farrell

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Co-signing and Insurance

Question: I'm divorced with 2 children who have college loans on which I cosigned. I want to make sure that if anything happens (god forbid) that I don't end up paying for those loans. They total about $50,000. Should I buy term life insurance for them? I know this sounds cruel, but I'm about to retire from the teaching profession on a limited income. Christine

Answer: I answered a similar question a couple of weeks ago on the air. I do think having your children buy cheap term life insurance to cover the student loan debt in case of tragedy makes financial sense. It isn't cruel, either. It's just practical.

02/27/08 by Chris Farrell

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An IRA and a Variable Annuity

Question: I'm 61 and will work until 65 or 66, unless my employer decides otherwise. My financial advisor is recommending that I put my IRA into a variable annuity for about 4 years, as I can get a guaranteed 5% return if the Market goes down and a better return if it goes up. The fees of the annuity plus the 1.3% fee the advisor is charging now would raise the annual management fee to 2.8%. I ran the numbers and his suggestion makes seems to make sense if the Market does go down for the next 2 years or more and I start taking money out at retirement.

The IRA is about 37% of my current retirement savings, I'm putting 19% of my income into my 401K at work, and pension and social security are expected to replace ~34% of my current income (no adjustments for inflation) if I stay employed until 66. Does a variable annuity make sense for me? Gary, Omaha, NE

Answer: I can't stand this tactic. The fundamental reason I dislike it is that an IRA is a tax sheltered account. A variable annuity is also a tax sheltered account. Therefore, you're wasting valuable tax shelter with this maneuver--and taking on huge fees at the same time.

The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator for all securities firms in the U.S., overseeing more than 5,000 brokerage firms, about 172,000 branch offices and more than 676,000 registered securities representatives. It periodically issues "Investor Alerts" and one was on variable annuities. In its typically cautious language, here's what FINRA has to say about the recommendation to mix together a variable annuity and an IRA:

"Investing in a variable annuity within a tax-deferred account, such as an individual retirement account (IRA) may not be a good idea. Since IRAs are already tax-advantaged, a variable annuity will provide no additional tax savings. It will, however, increase the expense of the IRA, while generating fees and commissions for the broker or salesperson."

You can read the whole investor alert at www.finra.org/InvestorInformation/InvestorAlerts. It's called "Variable Annuities: Beyond the Hard Sell." The bottom line: Don't do it.

03/31/08 by Chris Farrell

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Equity Investment Life Insurance?

Question: Chris---We have recently been advised by a financial consultant to begin to invest in an Indexed Universal Life Insurance Contract, also called an equity investment life insurance policy. After reviewing our financial situation with retirement in mind, the advisor told my husband and me, 55 years and 58 years of age, respectively, that we should stop putting our discretionary income into the qualified plans that we both have at work. He argues that we have enough in our qualified plans to maintain our current lifestyle and that we should begin to look for investments that shelter income from taxes for the future. The vehicle he suggests is an "equity investment life insurance policy". He argues this vehicle is a "Roth look-alike" and will allow us to grow our investments tax free, including the earnings that accrue in the account, and it will be tax free when it is withdrawn. The theory is that because tax rates will continue to grow higher, it would be better for us to be paying the taxes now on the money rather than after we retire, as current tax rates for us likely will be lower than future tax rates. Since our qualified plans defer taxes, he argues we have more tax deferred income than may make sense for us. The type of vehicle he suggests would have a cap on how much it would earn in a given period of time but it will also not go below the start level in any given year..... So, for example, we might buy a policy for $500,000 which would then have a monthly fee associated with it. He argues that we should not be overly alarmed by the monthly fee which includes all fees for transactions, etc. He argues we are paying mutual fund companies plenty of fees and the fees associated with this vehicle won't be higher than the total we're already paying various mutual fund companies.

We are cautious people and will not rush into any major change without thoroughly investigating its pros and cons. I told the guy we'll seek multiple points of view, as he will make his money from selling us on this product. Any guidance you can provide will be appreciated. Greg and Carol, Minneapolis

Answer: I'm not a fan of these plans, although they are a niche product that can work for some people. The fees are high (much higher than equity index funds, bond index funds, Treasury securities and the like). The equity formula is a complicated black box, which runs counter to my "keep it simple" mantra. And you can limit your downside portfolio risk through diversification, inflation-protected securities, and the like.

If it were me, and if I had the assets you have, I would hire a fee-only certified financial planner to look 1) at your overall financial situation and 2) evaluate this policy proposal in light of your assets, liabilities, goals and desires. Yes, a CFP isn't cheap. I could be wrong, but my bet is that she'll come up with a more cost-effective way to build a conservative portfolio.

04/10/08 by Chris Farrell

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Switching Life Insurance Plans?

Question: I am a single, 40 year old woman, no dependents. I got a New England Life Insurance policy about 13 years ago - not for a payout if I die prematurely, but as a way to save money for retirement. I have someone who has been helping me invest my money for these past 13 yrs. but recently sought a second opinion. This second opinion wants to take my money out of my current company and put it with Northwestern Mutual Life. I will lose $286 in a transfer fee, which isn't a big deal if it is a smart move. I will also lose ground as I am now 40 and will be paying a higher 'mortality rate' (using the wrong term but I hope you know what I mean). The man who recommends this move says Northwestern Mutual is such a superior company that the long-run benefit will overcome the short-term loss. What should I do? Thanks - Marti, Chicago, IL

Answer: For most of us, the main reason to own life insurance is to financially protect a loved one from our untimely death. That's usually a child, but it can be a parent or a partner. (Life insurance also plays a critical role in the estate planning of the wealthy.) Although you're accumulating savings, life insurance is not an especially efficient or cost effective retirement plan. It pales next to a 401(k), 403(b), IRA, Roth-IRA and other retirement savings plans--or just building up savings in taxable accounts, a home, and other alternatives. There's no rush, but I would go through your finances and see how life insurance fits into your overall plan, and decide whether it makes sense for you to keep a policy or not. It's dated, but I still find it a useful introduction to the topic is "Smarter Insurance Solutions" (Bloomberg Personal Library) by Janet Bamford.

That said, I'm concerned about this specific proposed shift. Your concerns and questions are legitimate. New England Life is a good, reputable company. It has a AA/stable rating from Standard & Poor's, the rating agency. Northwestern Mutual is an excellent company with an even stronger balance sheet at AAA/stable. Still, New England Life is no fly-by-night operation. It has a blue-chip balance sheet. (If it didn't my advice would be different.) You've owned the policy long enough that you're now really getting the benefits of the savings component. My fear is that this shift is not to your financial benefit but to improve the commission earnings of the "second opinion".

That's my worry. One quick, cheap way to check out whether this move makes financial sense for you is to contact the Consumer Federation of America. It offers a life insurance evaluation service. You can find the details at here. The service helps insurance consumers decide whether to buy a cash value policy or term insurance, decide among two or more cash value policies, and whether an existing cash value policy is worth keeping. The cost for the analysis is $70 for the first illustration.

04/17/08 by Chris Farrell

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Early Retirement and Health Insurance

Question: My husband and I are planning on retiring at age 50 (we have approx 13 years left)...meaning we hope to quit our 8-5 corporate jobs and find something more fun perhaps working part time at the local greenhouse or golf course. Many articles in magazines or stories on talk shows focus on how much to save but no one ever discusses healthcare options for those of us who want to retire early and will be without Medicare until age 65. We suspect healthcare will take a chunk of change but don't know how much or even where to find individual coverage. Can you please provide some guidance. Peggy, Minneapolis, MN.

Answer: You're right that the deal-breaker to early retirement is usually health insurance. It's expensive. Early retirement is probably out of the question for two groups of people: those who can't afford to absorb expensive annual health-insurance costs until Medicare kicks in at age 65 and anyone with a serious medical condition, such as diabetes or heart disease, that makes it next-to-impossible to get decent coverage.

Assuming you don't fall into those two categories, you should shop around and learn everything you can about deductibles, co-pays, networks, out-of-network costs, and other nuances of health-insurance policies.

I'd look into high-deductible plans. Basically, the higher the deductible, the lower the premium. The most popular high-deductible plans are those with preferred provider organizations that give price breaks for staying within a network. Still, coverage can range from bare-bones (read cheaper) to reasonably comprehensive (read expensive).

Better yet, consider a health savings account. You use these tax-advantaged savings plans in conjunction with a high-deductible policy. For a family in 2008, the catastrophic insurance policy has a minimum deductible of $2,200 and an out-of-pocket limit of $11,200. The maximum a family can contribute into the tax-sheltered account is $5,800. HSA contributions are made with pretax dollars, and any unused money in the savings account is rolled over for future use. Withdrawals are tax-free so long as the money goes toward qualified medical expenses.

You could also check out professional associations, trade groups, and even chambers of commerce offer group health plans to members, but they will probably be more expensive than an HSA or a high-deductible plan.

05/07/08 by Chris Farrell

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HSAs

Question: My employer is switching from a high-deductible health insurance plan to a traditional plan. I have accumulated enough in my HSA to be able to invest it in Wells Fargo mutual funds, which my employer provides along with the insurance. But with the switch I will no longer be able to add to the funds, and Wells Fargo will begin to charge me an account fee every month. What can I do with my HSA money? Andy, Ankeny, IA.

Answer: You're in a good financial situation. With your Health Savings Account (HSA), the contributions were made with pretax dollars. Withdrawals are tax-free as long as the money goes toward qualified medical expenses, which include everything from acupuncture to organ transplants to quit-smoking programs.

Your account remains tax sheltered. The only restriction is that you can't make new contributions. But you can always tap the account to pay for qualified medical bills that aren't covered by insurance. Better yet, if you don't need the money, it will compound in the account over time. You can then make tax-free withdrawals to help defray medical expenses in retirement. After all, Medicare pays for at most half the average retiree's health bill now, and most forecasts say that percentage will shrink.

One other point: As the sums in HSAs grow, more and more people are interested in managing the HSA for long-term growth. Instead of keeping the money parked in a low-risk bank money-market account, as is typical, some of that money is finding its way to equity mutual funds for the long haul. You could keep the money in the mutual fund accounts you have with the Wells Fargo managed HSA or you could roll it into another financial institution, too. (There can be restrictions, so check out the rules with your plan.)

05/13/08 by Chris Farrell

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Retirement Savings vs. Life Insurance

Question: I'm 56 and my wife and I together make around $80k and both contribute to our company matched 401Ks. I plan to retire at age 70. My insurance agent is suggesting I stop contributing to my 401K and instead buy a "Permanent Life" policy of $250k which he says will pay out better than if I stayed in the 401K (the company matches 50 cents on the dollar up to 6%)by spending down what I already have and spending down the dividends in the insurance policy. Is this possible? Is buying Permanent Life Insurance considered a good investment? Dennis, Silverthorne, CO.

Answer: I have a very simple point of view toward questions like this: When a company matches half of your contribution into a retirement savings plan you are outperforming over the long-haul Warren Buffett, George Soros, William Gross, and any other legendary investor of the past half-century. Why would you give up such a superior investment track record?

Financial planners disagree on many things, such as the cost and benefits of actively managed investment funds versus passively managed index funds. But most if not all would agree with me that everyone should take full advantage of their retirement savings plan at work--as well as IRA, Roth-IRA, SEP-IRA, or comparable products if you qualify--before even considering putting money into a cash-value life insurance product. Cash value life insurance, such as whole life, universal life, and variable life is not a retirement plan.

I'd stick with your 401(k).

That said, you should evaluate your need for permanent life insurance as a distinct financial planning question. For instance, at your age do you still need life insurance? If so, how much? Does your company offer a group policy? Is it enough, and if it isn't, how much more insurance do you need? Compared to permament life insurance, would it be better for you to invest the potential life insurance premiums in a low-cost tax-efficient taxable account, such as in the S&P 500--or not? These are the kinds of questions I'd pursue before buying a policy.

05/21/08 by Chris Farrell

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Diversify Financial Companies?

Question: We have just finished our annual retirement portfolio re-balancing. All of our accounts are with Vanguard. Should we consider having some accounts at a different company to spread the broker risk around? Howard, Bozeman, MT.

Answer: This question is coming up a lot recently, and with good reason: The collapse of the investment bank Bear Stearns, the handful of bank failures, the frozen auction rate preferred market, and the ongoing turmoil from the credit crunch.

What do I think? For many of us, it's easier to manage our retirement portfolio if the money is at one institution that offers good service, low fees and investment choice. But does convenience increase your risk? It does a bit, but not by much in most cases. I've gone back and forth on this issue several times over the past couple of years. In essence, my answer is "no", but...

First of all, the biggest protection you have is that your money is invested in securities. So, even if Vanguard, Fidelity, or some other major financial institution got into trouble you still own the securities. (Of course, ownership doesn't prevent the value of your portfolio from going down.) There is also Securities Industry Protection Corp. backing that provides an additional layer of security in case of fraud and malfeasance. (You can learn more about it at www.sipc.org.)

What's more, most of us end up with a kind of natural financial institution diversification. You have your retirement portfolios with Vanguard. I bet you have savings at a bank or credit union, a life insurance policy with a life insurance company, and so on. If you look at your household as a single entity you're probably reasonably diversified overall--even if your retirement portfolios are managed by one firm.

Now for the proverbial "but." In an era of financial supermarkets and one-stop-shopping it's possible to concentrate amost all your financial assets with one firm. At that point say "stop," and diversify. The lack of diversification is one reason why I have never been enamored with the financial supermarket idea. The other is that experience shows a firm good at managing mutual funds isn't necessarily the best at creating other competitive financial products. It always pays to shop around.

08/15/08 by Chris Farrell

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Extended Warrenty on a Car?

Question: I signed up for an extended warranty for my car. It has 75,000, the warranty costs $3000 and will cover me for 60,000 more miles. I asked my mechanic about it and he said he didn't think it was a good idea but told me to bring it in so he could see it. After he read it, he said it was a good warranty and should help me keep my car for another 60,000 miles. He also said he worked with the company before and they were reputable. He's not at all connected to this company. Am I stupid to do this? Lynda, Minneapolis, MN

Answer: You are definitely not stupid. Now, I'm with your mechanic when it comes to extended warranties: The insurance policy is usually not worth it. In many cases, you can do better on your own. One strategy is to put the money you'd pay in premiums aside as part of your overall savings, and then draw on your that pot of money for repairs. Another is to include car repairs as part of your overall financial plan. As a general rule, there are a lot of truly bad extended warranty plans out in the market that line the pocket of the seller and cost the buyer a bundle.

However, "usually" is not the same as "always." You've done what I always recommend with extended warranties. Do your research. Check out the policy terms. Make sure you're working with a reputable firm. Get some expert advice if you can. You've done all those things by tapping into your mechanic's expertise. Also, how reliable is your car and what is the track record of the make and model as it ages? We all know that some cars are highly reliable and others seem to start falling apart not long after the manufacturer's factory warranty expires.

Thinking through whether or not an extended warranty is worth it is like evaluating any other insurance policy. Will having the extended warranty give you peace of mind? How fragile is your budget to a major car repair? Is the actual policy both understandable and favorable to you? In other words, does the extended warranty do what you think it should do?

In most cases, the answers come out on the negative side of the personal finance equation. But in your case, going with your trusted mechanic, it looks like you bought yourself some peace of mind.

09/03/08 by Chris Farrell

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Life insurance for a young military family

Question: I am the 22 year-old mother of a 6 month-old daughter. I am currently unemployed while I take classes to complete my college education and my Husband is deployed with the National Guard overseas. I am concerned about my family's financial future if anything should happen to either myself or my husband. I would like more information about various life insurance options. What kinds are there? What is the difference between the types? How do I pick what one is right for my family? Are there any books or online resources with accurate and easy to understand information? Thank you for your time and help. Sincerely, Jodi, Jonesboro AR

Answer: This is a fittiing question for Veterans Day. First of all, since your husband is on active duty with the military you should be automatically covered for $400,000 in life insurance benefits through Servicemembers' & Veterans' Group Life Insurance. Here's what the handbook says: "Members on active duty, active duty for training or inactive duty for training and members of the Ready Reserve or National Guard are automatically covered for $400,000, the maximum amount of coverage."

He can also purchase up to $100,000 of SGLI coverage for you, in increments of $10,000.

The policy offered by the government is a "term" life insurance policy. Term life insurance is a pure death benefit. It doesn't pay dividends and there isn't any cash savings attached to the policy.

The section of the U.S. Department of Veteran's Affairs website that describes the life insurance benefit offers good information, including details on the policy, a calculator for figuring out how much life insurance you should carry, a life insurance glossary, and a description of the basic types of life insurance.

The differences between life policies matter a lot if you and your husband decide your family needs more life insurance--especially adding more coverage for you in case something happened to you.

Life insurance comes in two basic flavors. The first I've already mentioned, term insurance. Term insurance is a simple product, easy to understand, and it allows for competitive comparison-shopping for the best mix of price and coverage. You'll want a low cost, plain vanilla policy from a blue chip, financially strong life insurance company. Term insurance is ideal for most families with insurance needs, like you.

Cash value is the other major kind of insurance. Cash value insurance always comes with a tax sheltered savings component as well as a life insurance policy. Cash value life insurance can be complicated. There are all kinds of policies, from whole-life, universal-life, variable-life, variable-universal life, and so forth. Depending on the type of cash value policy, the insurance company may invest the savings for you or you may choose from a menu of investment options. The premium may be stable for the life of the policy or you may vary your payments. In general these policies are expensive.

11/11/08 by Chris Farrell

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Bankruptcy and Cobra

Question: We hear lots about the Stimulus Plan helping folks pay for their health insurance when they go on COBRA, but what about people who lose their jobs when their company ceases to exist. There are presumably lots of folks in that bind. They are not eligible for COBRA but are newly unemployed. Is there any health insurance help for them in the stimulus plan? Rob, Seattle,WA

Answer: In essence, the rule called Cobra-- Consolidated Omnibus Budget Reconciliation Act of 1985--requires most employers with group health plans to offer employees the opportunity to continue their health care coverage for up to 18 months. With the passage of the fiscal-stimulus package the federal government will now pick up 65% of the cost of Cobra for up to nine months.

However, you're absolutely right: If a company liquidates and discontinues its health plans, COBRA coverage for its former employees isn't an option.

The Department of Labor has a brief write-up on bankruptcy and Cobra. Here's the key paragraph:

"If, however, your employer discontinues all its health plans, COBRA continuation coverage will not be available. You will have to seek other coverage. Other coverage may be available by converting your employer's group health coverage to an individual policy. As mentioned above, you may also have rights to special enrollment in a spouse's employer's plan, or by being an "eligible individual" who is guaranteed access to individual insurance. The opportunity to buy an individual insurance policy is the same whether the individual is laid off, is fired, or quits his or her job. "

By the way, the Department of Labor has posted on its web site information on Cobra and the new subsidy on premium payments. However, the fiscal stimulus package is a huge bill so hopefully I've missed something. Is anyone aware of the new law changing the rules when it comes to liquidation and Cobra?

03/09/09 by Chris Farrell

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Credit unions

Question: My sister and I are having differences of opinion in investing our Father's money. He is in Assisted Living, age 93. Right now, the money is in U.S. Treasuries and earning very little interest. My sister wants to take most of the money ($150,000) and put it into CDs with SchoolsFirst Federal Credit Union which would earn 2.5%. I want his money to be safe and wonder about the financial footing of this credit union. Supposedly it is sound. Any suggestions? An avid listener of Marketplace Money on Saturday mornings. Linda, Tulsa, OK

Answer: I'm not sure I want to come between you and your sister, but we do get a lot of questions about the safety of credit unions. It's impossible for outsiders like you and me to judge the financial soundness of any bank or credit union. In the jargon of Wall Street, financial institutions are "black boxes." We can't figure out what's going on inside (and it turns out even the insiders couldn't figure it out).

What we can do is make sure the financial institution is backed by the FDIC or its credit union equivalent, the NCUSIF. That stands for the National Credit Union Share Insurance Fund. It's an arm of the National Credit Union Administration or NCUA.

Enough with the acronyms. I checked online, and SchoolsFirst is a federally insured credit union. The rules are the same as the bank FDIC limits: Deposits are insured up to $250,000. So, the money your father has would be fully covered.

You can rest easy if you put the money into a federally insured credit union. What if the credit union failed? (To be clear, I'm not saying it will or is even at risk of failing.) Your money is safe. The worst that could happen to it is that you can't get access to the money for a few hours or perhaps days (and I'm spinning out the worst case scenario here). The other risk is that the terms of the CD could be changed if the credit union was seized by the regulators and sold to another institution. The principal is completely safe, of course, but sometimes the interest rate on the CD is cut.

In a sense you can't go wrong so long as you stay short and stay safe. While I was writing this I wondered if a good solution was to decide on a mix, keeping some in short-term Treasuries, and adding some short-term CDs and savings account.

03/10/09 by Chris Farrell

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AIG policyholder

Question: I'm the beneficiary on a traditional life insurance policy (i.e. the basic AIG business) on the lives of my parents who are still alive. What protections are there on the beneficiary in various scenarios that might happen to AIG including bankruptcy, selling the traditional life business, etc. Thanks so much, and thanks for your weekly recommendations. Susan, Baltimore, MD

Answer: With all the anger directed at AIG, it seems that the millions of life insurance policyholders have been forgotten. Like you, many are nervous, wondering if their money is safe, and the hysteria in Washington isn't helping. The simple, direct answer is yes: Your money should be safe.

Life insurance policyholders have several layers of protection. None are foolproof, of course. But AIG life insurance operations have a good reputation. First, the AIG turmoil involves the parent holding company, and not its giant life insurance and retirement money management subsidiaries. Second, the life insurance operations are well funded, and by law the assets of the insurance company are segregated from the parent company. Insurance company assets are supposed to be invested conservatively. If the insurance companies did get into trouble state regulators would take them over, and the law requires them to be run by regulators in the interests of policyholders. Creditors and any other claimant take a backseat. Last, there are state insurance guaranty funds that offer another layer of protection.

There is one new buffer, perhaps the strongest yet: You, I, and all other taxpayers now own most of AIG through the federal government. Even in an era when the financially unthinkable happens, I can't imagine the federal government allowing the AIG insurance companies to short-change its policyholders.

03/20/09 by Chris Farrell

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Life insurance

Question: We are both 54 years old, professionals, still working. We own our home and have no debt beyond $30,000 in a home equity loan from building our home. We have about $200,000 in savings and plan to work at least part time for several years. He has a government pension, we will both have SS income (if its till solvent!) We each have term life insurance but they are getting expensive (his for $400,000, mine $75,000). Is it really important to have insurance at this time? We have no other dependents. Pam, Jeffersonville, VT

Answer: You are at a good age to evaluate your need for life insurance. You have little debt, lots of savings, and good pensions. You plan on working even during retirement, which means your savings can compound longer. (And Social Security will be there when you decide to tap into it.) You have no children or parents to worry about.

Now, you're still young. I don't have a magic number to suggest how much you should cut back. I would consider if it makes sense to look into whether you should enjoy equal financial protection from the death of the other instead of the wide disparity in coverage you have now. There are a number of life insurance calculators on the web. They're simple but they give you some guidance, and you can find one here and another here.

Here is a thought for your calculations that makes sense to me: You should each have enough life insurance so that if one of you dies the other doesn't have to worry about money for a period of time. The survivor can take a year or more--you decide--to deal with their grief, without worrying about earning an income, paying down debts or draining the savings account.

Again, your savings may be enough. But I'd also think about factoring in a bit of mad money into the calculation, a sum to try something new, to pursue a dream. When a loved one dies it painfully reminds us of our own mortality. Like Woody Allen said, "Life isn't a dress rehearsal--it's reality."

05/14/09 by Chris Farrell

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Health Savings Accounts

Question: I'm in the market for an HSA. Any suggestions on how to shop around and find the best provider? There are so many, it gets confusing. Jeremy, Santa Cruz, CA

Answer: Health Savings Accounts (HSA) are confusing. The insurance component is actually a high deductible catastrophic policy with an attached tax-sheltered account. The HSA contributions are made with pretax dollars. Withdrawals are tax-free so long as the money goes toward qualified medical expenses, which include everything from acupuncture to organ transplants to quit-smoking programs. The money is usually parked in a banklike account and beneficiaries of the plan receive a checkbook or debit card for paying bills. It's like a Flexible Spending Account--except that with an FSA, you forfeit what's not spent in a calendar year while unused HSA money rolls over.

As you can imagine the terms of the policy can vary a lot. Two places I know for comparison shopping are eHealthInsurance.com and HSA Insider.

Any other suggestions?

05/28/09 by Chris Farrell

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A whole life policy

Question: My wife and I are in our early 50s. We have been told that we should have a whole life policy in our investment portfolio as a conservative investment vehicle (we currently carry $150,000 term life policies on each of us). Our combined gross annual income is approx. $155,000, and we are saving for retirement in 401Ks at approx. 15% of our annual income. We also invest in Roth IRAs and have two homes that are nearly paid off. So, about the whole life for us, what do you think? Thanks very much! - Tim, Indianapolis, IN

Answer: I'm skeptical. Do you need more life insurance than you are currently carrying? If yes, why not simply hike the amount of term life insurance you have currently. Or do you face a future that calls for a whole life policy?

A whole life policy combines a death benefit with a tax-sheltered savings account. In essence, you pay a premium for the coverage, the insurance company deducts insurance and expense charges, and then it credits the rest of money into a tax-sheltered interest-bearing checking account. It can quickly gets a lot more complicated than that, by the way, but that's still the essential idea.

I like judging whole life from the perspective of does it meet your life insurance needs better than term insurance?

To be clear, whole life fills a need. But I'm skeptical that its a conservative investment alternative for many people. If you need a stronger hedge against bad times in your overall portfolio why not put the money into all kinds of conservative savings choices, from CDs to Treasury notes to I-bonds. The cost of owning investments like these are minimal. (And if you buy I-bonds, bills, notes and bonds directly from the Treasury there are no commission costs to buy.) You don't have to worry about default risk. Interest rates won't always be at such razor thin levels, either. You can be tax smart with these alternatives, too.

Clearly, you're good savers with plenty of assets and almost no debt. I think I would just continue what you're doing.

If you do go the whole life route, take your time, shop around, and ask lots of questions.

10/08/09 by Chris Farrell

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Life insurance

Question: My husband and I are considering getting life insurance. We are 30 years old and we don't have kids but would like to have them in a few years. Our combined income is 150,000 and our only debts are our mortgage (350,000) and student loans (15,000-me, 40,000-husband). I've read in personal finance books that we should only consider term life insurance. Is that the case, and how do you figure out how much life insurance is right for you? Erin, Rockville, MD

Answer: There's really only one reason to buy life insurance: To financially protect our loved ones from our untimely death. Most of us realize we need life insurance when we have children. But I think it makes sense even for married folks without children to consider buying life insurance. It's a way of making sure that if one of you dies the other doesn't have to worry about money for a period of time. That's how I would start figuring out how much life insurance you need: How long do you want expenses to be covered to give the survivor some freedom? One benchmark is giving the survivor a year to deal with their grief without worrying about earning an income, paying down debts, or draining the savings account.

What kind of life insurance should you buy? I would go with "term" life insurance. Term is a pure death benefit. Premiums are cheap if you're in good health, although the cost of the policy does increase as you age. It's a simple product, easy to understand, and it allows for competitive comparison-shopping for the best mix of price and coverage. You'll want a low cost, plain vanilla policy from a blue chip, financially strong insurance company.

10/15/09 by Chris Farrell

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