Questions & Answers

A sample of questions answered by Golden Trail Advisers on Investopedia


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What are the differences between a revocable trust and an irrevocable trust?

You would set up an irrevocable trust if you want the money to be out of your name. With a revocable trust, the money still would be in your name. Two reasons for making a trust "irrevocable" would be estate planning or asset protection.

Before you set up an irrevocable trust, be sure you won't need the money in your name later for another purpose. As my fellow professionals pointed out, you cannot change terms or get back the money you put into an irrevocable trust.

Another difference is that an irrevocable trust needs to do a tax return each year that it generates income. That can be costly, time consuming or both.

Hope this helps your understanding.

Is a cash value life insurance policy a good idea for me?

Not a good idea.

Money in a life insurance policy is not liquid without loans or taking out money that would reduce your death benefit. So, it should not be treated as the conservative portion of your portfolio. However, it is wise to pay off the life insurance that you will keep until you die while you are working. That will give you one less expense in retirement.

This comes down to my fundamental belief: life insurance should be separate from money needed for everyday living.

How should my wife and I begin saving for retirement at 51 years old?

To start saving for retirement, first, you should figure out how much you need to live on in retirement. Then, you can determine the amount you would need to save each year. Retirement calculators could help you with this. A financial planner probably could do a better job for you, taking into account taxes, Social Security, health care costs, etc.

Let's say you determine that you need to accumulate $500,000 by age 65. Assuming 5% returns, you would need to save about $25,512 per year. We will ignore taxes for now.

Knowing this amount (saving and investing $25,512 annually to get to $500,000 by age 65), you should look at the options available to you for investing. If you or your wife have a 401(k) plan at work, especially if there is a match from the employer, that is probably the best place to save money. The tax deferral at this stage of life might be valuable. But if not, many 401(k) plans offer Roth accounts, as well.

A separate question is what to do with three life insurance policies with a cash value of $60,000. We do not typically use cash value life insurance as part of our financial plans. We recommend term life insurance because the cost of term per $1,000 of death benefit is much less than the cost of cash value insurance. The commission paid to life insurance salespeople is much higher for cash value than term.

We believe a person should have sufficient term life insurance to cover an untimely death while he or she is building assets. Had you died before your son finished college, for example, your life insurance payout should have provided for his college. If people reach their savings goals, there is a point where they have sufficient assets and do not need life insurance. This should be part of the financial plan.

Life insurance policies. It is possible that the policies you have in place are OK and should be left alone. Another option available when people are insurable without being rated up for a health issue is to replace cash value insurance with term insurance. A 15 year term policy might be appropriate for someone who is 51. In that case, the cash value could be freed up for investment.

How to access the cash value? Tax rules allow the conversion of cash value into an annuity without paying taxes. This is called a 1035 tax free exchange. For life insurance, the principal can be withdrawn before the gains. So, some people take out the principal (tax free amount) from their cash value and then roll the taxable portion to an annuity. Up to $6,500 per spouse of tax free withdrawals could be put into a Roth IRA, assuming both are eligible for Roth. Then, only the taxable portion could be exchanged into one or more annuities. I would caution against the high-fee annuities, which have long periods of surrender charges.

After money from life insurance is exchanged into an annuity, the gains (taxable) must be withdrawn before the principal. That is the opposite of a cash value life insurance policy (tax free money comes out first), which is why you want to plan any disbursements/exchanges from life insurance carefully. Last point is that once you exchange money from life insurance to an annuity, you cannot exchange it back to life insurance without being taxed on any gains.

I hope this discussion is helpful. We would need to know more about your situation to give you recommendations.