Q: What do you think about the so-called "baby/children" whole life insurance policies that parents, grandparents and guardians receive in the mail? -- MF via email
A: They're a sad waste of money.
Life insurance is a terrific way to replace your income for your dependents. There's no reason to buy it for a child unless he's supporting the family.
Parents can best protect a child with life insurance by getting bigger policies on their own lives. Both parents should be covered, says Richard Freeman, a principal and certified insurance consultant at Round Table Financial Services in Westport, Ct. If Dad's an investment banker and Mom's home with the kids, her policy shouldn't just cover the cost of a nanny to replace her, he adds. It should be big enough to let Dad take a job with shorter hours closer to home, so he can have time with the kids if he's the surviving parent.
The sales pitch for life insurance on a child is that the policy guarantees him the right to buy more coverage without a medical exam. If he develops health problems later in life, this far-sighted purchase could be only way he'll qualify for coverage! The reality: Very few people are rejected for life insurance anymore. Thanks to medical science, you can live for years with diseases that would once have killed you. Even people who've had cancer or a heart attack are no longer uninsurable. (Remember, we're talking life insurance, not health or disability coverage.)
Another pitch is that the policy is a tax-sheltered investment for the child's college education. The reality: Life insurance is an expensive, inefficient way to save for a child. Your investment options in the policy are limited and overpriced, and a big chunk of your money goes to the insurer's marketing costs. And your earnings are taxable as ordinary income when you withdraw them.
Let's say you put $5,000 into a policy, and it's worth a little over $10,000 by the time Junior goes to college. You can withdraw $5,000 tax-free because i's a return of principle. You can take another $5,000 as a tax-free policy loan. But if you terminate the policy -- i.e., stop paying premiums -- the $5,000 loan immediately becomes a taxable withdrawal, says Freeman. To avoid the tax, you must maintain the policy until you die.
A 529 plan or a Coverdell Savings Account are much better savings vehicles. A Coverdell can be used for expenses from kindergarten through college. A 529 plan is only for college. Earnings in both accounts are tax-free when spent on eligible expenses. If the child named as the account beneficiary doesn't have educational expenses, you can use the Coverdell or the 529 account to pay for another family member's education. (Earnings spent on non-educational costs are subject to taxes and a 10% penalty.)
In a Coverdell, you have virtually unlimited investment options; the accounts are available at any bank, mutual fund, or brokerage. You can deposit up to $2,000 a year, depending on your income. Contribution limits gradually decline for single taxpayers with income between $95,000 and $110,000 and married couples with income between $190,000 and $220,000.
A 529 plan has no income requirements or annual contribution limit. Each plan offers its own menu of mutual funds. New York's 529 plan funds are managed by Vanguard Group, a first-rate, low-cost provider. State residents who are single taxpayers can deduct up to $5,000 of annual 529 contributions from their New York income taxes; couples can deduct up to $10,000 a year.
Q: My 24 year old daughter accepts and activates and maxes out every credit card and department store card that she's offered. She can't hold a job for more than a week and is on 3 anti-depressants. I wind up paying for them, but months later I find out she'd done it again. I'm on Social Security, and I can't and won't pay her bills any more. I've put her name on the No Offers list forever (which stops banks), but I have no clue as to how to stop department stores from offering her credit. Do I have to resort to not paying her bills until collection agencies get involved, thus ruining her credit, or is there a less painful way? -- SW via email
A: Sadly, no. There's absolutely nothing to be gained by continuing to pay her bills. It endangers your financial security, and it doesn't help your daughter. But make no mistake: It won't be your refusal to pay that ruins her credit. She will have done that to herself.
A parent has no legal responsibility for the debts of a 24 year-old child. (For purposes of child support, the age of majority in New York is 21; in other matters, it's 18.) However, you are liable for debts on any credit cards that you co-signed with your daughter, or cards in your name on which she is an authorized user. Those are cards you should pay off and cancel immediately.
But of course the legalities aren't your main focus. You're grappling with one of the most painful realities a parent can confront -- the fact that you can't protect an adult child from his or her own self-destructive behavior. Your daughter is the only person who can tackle her problems; and from what you say, she won't start doing that until she has no alternative. As long as you keep bailing her out, the money she spends isn't real to her. It's as if she's playing adult Monopoly, says Catherine Williams, vice president for financial literacy at Money Management International, a not-for-profit credit counseling organization.
There is one positive in all this: It's far better for her ruin her credit rating at age 24, with plenty of time to repair it, than when she's older, and even deeper in debt.
From what you say, it's clear that she needs professional help. She should ask the doctor who prescribed her anti-depressants to suggest counseling for her. She might also benefit from joining an organization like Debtors Anonymous, a 12-step program for people who compulsively rack up unsecured debt. (For more information, and a link to a list of the organization's meetings in New York City and on Long Island, go to www.debtorsanonymous.org, or call (800) 421 2383.
But you can't force her to seek help; and now that she's an adult, her doctor won't discuss her situation with you. You should focus instead on protecting yourself -- and that won't be a disservice to your daughter. As airline personnel always remind us on departing flights, if the air quality in the cabin deteriorates, and oxygen masks drop from the overhead compartment, you should pull your mask over your face before you help your child put hers on. By staying financially solvent, you won't just be better able to care for yourself. You'll also be better able to provide your daughter with three meals a day while she gets the help she needs, if that's what you wish to do.
Q: My husband is 80 and I am 72. Our only asset is his IRA, which is worth $30,000. Our total income from Social Security is $1,630. We also withdraw $300 a month from the IRA. We have $7,000 in credit card debt. Would it be wise to take $7,000 from the IRA to pay off the cards? -- CS, via email
A: I don't think so. A $7,000 IRA withdrawal wouldn't be taxable in your case, but it would take a huge bite out of money that you need for your basic living expenses.
For younger people, paying off credit card debt is a high priority. A big balance hurts your credit score, making it harder to rent an apartment, to get a mortgage or a car loan, even to land a job. Paying off debt is also important for older people who can afford to leave an inheritance for their children. When you die, your debts are paid out of your estate. Depending on your assets (some are protected from creditors) that can mean less for your survivors.
But tapping an IRA is a very expensive way for most people to pay debts because IRA withdrawals are taxable.
Your situation is quite different.
You have no taxable income, says Barry C. Picker, a Brooklyn tax accountant and financial planner. Social Security benefits aren't taxable to a married couple filing jointly whose your annual 'provisional income' is less than $32,001. 'Provisional income' is half your Social Security benefit, plus all your other income -- including tax-exempt income, pension income and withdrawals from your retirement accounts. Your provisional income is $13,380 -- $3,600 from your IRA plus $9,780 (half your Social Security benefits).
Even if you increase your IRA withdrawal by $7,000 this year to pay off your credit card debt, your 'provisional income' would only be $20,380. So your Social Security income still wouldn't be taxable; and the tax on the $10,600 IRA withdrawal would be more than offset by your personal exemptions and standard deduction.
But your risk isn't a credit history that will prevent you from getting a mortgage, a job, or a student loan. Your big risk is running out of money. If you paying off your debt with 25% of your IRA, you'll probably be forced to run up new credit card balances just to cover your living expenses.
In your case, it's wiser to keep making minimum, on-time credit card payments. (From a card issuer's viewpoint, your minimum payments have value. They're predictable cash flow.) The worst-case scenario: The issuer might raise your interest rate, which would boost the minimum payment, says Greg McBride, senior analyst at bankrate.com, a personal finance website. But that's a risk worth taking, he adds.
You should also know that New York law protects your husband's IRA from his creditors. Even if he filed for bankruptcy, they couldn't seize any part of the account to pay his debts. And if you inherit the IRA as his beneficiary, it will enjoy the same protection from your creditors.
Under current New York law, a spouse is the only IRA beneficiary who gets that protection. The law doesn't actually protect inherited IRAs from creditors, says Seymour Goldberg, a Melville estate lawyer. Spouses are the exception because an IRA left to a spouse isn't considered an inherited IRA. The reason: You can roll your deceased spouse's IRA into a brand-new IRA of your own. By contrast, a non-spouse beneficiary must maintain an inherited IRA under the name of its deceased owner. Goldberg says anyone wishing to leave an IRA to a non-spouse who may be vulnerable to creditors can protect the account by leaving it to an irrevocable trust for that person's benefit.
Q: We have three children over the age of eighteen living at home. They have cars which are about to be put into their own names. None of these kids have any assets to speak of. Our question is if they get car insurance under their own names (the minimum amount allowed by law) and they get into an accident, do we have any liability/responsibility for any damages which may have occurred? Is it necessary, or wise, to include them under our umbrella policy? -- SC, via email
A: If the cars are in your children's names, you won't be liable for any accidents they may have. The liability will be theirs. Adding the kids to your umbrella policy isn't an option; that policy only covers damages for which you are legally responsible.
There are two schools of thought about how to insure young adult drivers, and it sounds as if you've confused them.
The first view is that when your kids start to drive, you should let them use a car that you own, and add them to your own auto policy. Of course, your premiums will rise sharply. Nevertheless, this option is usually cheaper than putting a car in a young adult's name and buying him his own policy: His insurance rate is lower when he is covered as an occasional driver of your car than as the primary driver of his own car.
If you're as concerned about your child's driving as you are about the cost of his coverage, this choice has an additional benefit: He'll probably drive your car more carefully than his own; and you'll have more control over when and how he drives it.
But there is a drawback: When you own the car he drives, you're financially liable for any accidents he causes while driving it. That's why it's especially important for parents who let children drive their cars to own a personal liability umbrella policy. The umbrella policy increases the liability insurance you already have in your automobile and homeowner's policies -- and it's cheap. You can buy a $1 million umbrella policy for about $350 a year.
The alternative course is the one you've described, which is to put a car in your child's name and insure it separately. This is usually more expensive than adding him to your policy; but it protects your financial assets from any liability suit that may result from the way he drives. (Of course, it's still a good idea to own an umbrella policy.)
Whichever option you choose, take time to comparison shop for car insurance. You'll be well paid for the effort. The cost of coverage varies dramatically from one company to another. It's easy to get price quotes online. Progressive Insurance Corp. (www.progressive.com) gives quotes on its own policies and those of up to three other insurers at no charge. Also check out Geico (www.geico.com). You can compare their rates with those of other auto insurers, which are available at www.insweb.com and at www.insurance.com. Ask each insurer about discounts. Many companies discount premiums for drivers who've taken defensive driving courses, for example.