Life insurance: Best to keep universal life policy – or drop it?
Life insurance packaged in a universal life policy is rarely the best investment. Term life insurance is cheaper; other investments, better. See question No. 4 in this Reader Mailbag.
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Relocation decision
2. Filing internet documents
3. Roth IRA novice
4. Universal life insurance
5. Exchanging money
6. Graduation gifts
7. Cooking a whole chicken
8. Blogs and giveaways
9. Reversing charge-offs
10. Mortgage now or later?
The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.
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It is absolutely amazing to watch my five year old son and his one year old little brother interact with each other. They’ve been playing a game that they’ve made up with a green ball and a pink ball for half an hour – seriously – and they’re both still laughing. They entertain each other so much.
Q1: Relocation decision
I have a college degree in journalism, I worked in the field successfully for 10 years. However, I was faced with constant cuts in benefits, low pay (highest I ever got was $27,000 as a weekly newspaper editor), low morale, positions eliminated and being told to take on the extra work, but yet not allowed overtime or comp time, etc. etc. Oh, and at my last job, the ceiling was literally falling down on us. The last straw was last month the owner of the company told me to ignore certain “controversial” news stories and write more “positive” stories. I was told to ignore elected officials’ violations of the law. This was in direct violation of my professional code of ethics, and like I said, it was the last straw. I resigned.
I am now at home with my 7-month-old son. It has been an adjustment, I have worked all my life. My husband is an EMT and makes decent money (around $26,000 a year base salary) and gets lots of overtime whenever he wants, especially now I’m at home for childcare. He really likes his job. I am bringing in money as a SEO content writer. Writing comes easily to me, and I can make the same money I made as a journalist in half the time. Neither one of our jobs offered good health benefits so we always bought our own insurance, so we’re ok on that.
We do have quite a bit of consumer debt, one car loan, and some smaller medical debts from our son’s birth. I have worked so hard this year paying the smaller debt off. I’m paying the minimum on the credit cards and hopefully will be able to focus solely on the credit car debt by the end of the year. We live in western Kentucky which thankfully has a low cost of living.
I have a job opportunity in June back in our hometown. We have lived four hours away from our families for 10 years, we miss them so much. And they miss us, and now the grandbaby (first grandchild on both sides of the family!). The job opportunity is a reporter position at a newspaper — $27,000/year with decent benefits. However, they were upfront about pay freezes and furloughs (4 unpaid days every quarter). The company that owns the paper is hurting, as are most print newspapers.
If I take that job, we will have to move in with my in-laws until my husband finds a job. They have an apartment in the basement, and an already set-up nursery. I love my in-laws, and I project we’d probably be with them for about six months until my husband gets a job and we can find a place to rent of our own.
But I am torn. I’m stating to like being a work-at-home mom! I worry that SEO writing may not always be a good option though. I used to do merchandising, court research and mystery shopping for side income, and I could always get back into that. I feel there are lots of ways I can bring in money but also be here for my son. My husband and I have our routine down with childcare and balancing our schedules. We rent a little house that’s perfect for what we need. Working from home I am so much less stressed. I’ve started writing a book! The house is cleaner! We plan and cook our meals more! We have inexpensive family outings once a week now!
So our two options are: A. Stay where we are, four hours away from family, and I work on diversifying my work-at-home options while writing SEO content articles. Keep working on our 3-year plan to get out of debt and have a second child. Or B. Move back home, and I take the reporter job, which is a more guarenteed income — maybe. My husband is unemployed for a while and we live with family. Our debt repayment plan will probably have to take a backseat for a while till we get re-established. But at least we have the support of our family and my son will grow up around his aunts, uncles, grandparents, etc. What do you think?
If you are surviving financially in your current situation, your biggest consideration should be to create the best life for you and your family. The decision to move back home depends heavily on your relationship with your family.
It sounds like moving back there would give you income equivalence with what you have now (you’d have a job that paid roughly what your husband’s job pays now), so there’s not a big difference there.
If you’re deeply concerned about the bottom dollar, are you sure there isn’t an option C, where you move back home, take the job, still do some freelance writing in your spare time, and see what happens? After all, you’ll have the support of family, which should make it easier to find some spare time for things like this.
Q2: Filing internet documents
You talked about the electronic filing system in the 100 things to do during a money free weekend. You wrote that in 2007 and talked about scanning all your documents. For the most part almost all my bills etc. come via the internet, at least all my regular ones do. Does that change anything about your system? If I can access all those bills via my different accounts with do I need to save them additionally as well? I also keep 7 years back worth of my financial papers but then I shred (and burn) the years previous to that each year. I thought that was as far back as was necessary to keep?
The solution here is easy. Just save copies of the electronic statements you receive in the folders you use for your document filing. If it comes in an email form, save that email. If you retrieve them from a website, log onto that site and save the statements.
The key is to have easy access to all of these statements in one place on your computer. If you’re getting most of them electronically anyway, this process just becomes much easier.
If you’re keeping everything electronically, there’s no reason not to keep older statements. It’s just a tiny slice of hard drive space.
Andy had another question of interest, too.
Q3: Roth IRA novice
Should we work with a financial planner to establish Roth IRAs or is this something a novice can do? Honestly I have read the investment stuff in the past and learned a lot through the Motley Fool back a decade ago but honestly that sort of thing makes my eyes roll back in my head and my mind swim. My husband and I both work in education (elementary teacher and librarian) so our jobs everyday require lots of thought, decision making and learning. This aspect (index funds, company financials etc) of taking care of our finances just feels like it sends my brain into meltdown mode.
I did my Roth IRA myself with little difficulty. I spent some time researching various investment houses, settled on using Vanguard, and then they walked me through setting things up. I then spent some time looking at the various investment options there before settling on just using a Target Retirement Fund.
The advantage of using a planner is that you don’t have to spend the time researching. The disadvantage of using a planner is that you’re hoping they don’t have their own agenda and are genuinely picking the best option for you. For example, planners will sometimes steer people towards certain investment houses and plans so that the planner can earn commissions, even though the option isn’t really the best one for you.
The piece of the puzzle that usually pushes me to encourage people to do it themselves is that you tend to learn quite a lot during the process.
Q4: Universal life thoughts
I wanted to get your opinion on Universal Life policies and whether or not the savings mechanism built-in is worth it as compared a simple Term Life policy and a separate savings account. I know Dave Ramsey’s take is that it not really worth it which for the most part I can see the argument, I just think at this point in time it might be worth it for us. My Husband as a $100K Unviersal Life policy with a monthly premium of $100. Basically $24 of the monthly amount goes to account expenses/fees and the actual premium for the coverage. The remaining $76 is put into account with a declared interest rate of 4.75%. So for us right now its basically a forced savings account. I like to think of it as our Emergency Fund since basically that is basically what it has become at this point since we have no savings. We are currently in a position where due to decrease in income (45% of my husband’s income), past poor decisiosn and spending habits, we have more going out than coming in. Our current take home is $6200 on a low month and $7700 in a good month at this point. We have a high mortgage (1st has been modified and we are working on the 2nd), a high car payment that will be paid off in 28 months, $55K in Credit Card Debt, plus the standard monthly utilities bills, gas, groceeries, etc. We are trying to get back on track and are committed to getting out of this mess. My husband has a second job which has for right now temporarily supplemented an additional loss of income from his 1st job – my husband is self-employed. We’ve cut the cable which saved us $70 a month which then immediately went to pay for the increased gas budget. But I’m glad we cut it. My question is given our situation are we better off actually having a regular savings and getting rid of the policy (he does have another $250,000 Term Life policy) and just create our own forced savings plan since for the most part the interest earned annually only partially covers the expenses on the account, or for the time being keep it and reevaulate in a few months? Your thoughts would be greatly appreciated.
If you look at the components of a universal life account, what you’ll find is that you’re usually buying an overpriced term life policy packaged with some sort of savings account opportunity. Taken alone, the savings account option often looks really good, but what’s often neglected is that in order to put money into that account, you have to buy a really suboptimal policy. While I can’t quote you a life insurance rate, I would not find it surprising that your husband could get a term life policy for $16 a month rather than the $24 a month you’re paying into the universal policy.
So, if you run the math there, you could either have that universal policy in wich $76 a month goes into an account that returns 4% or, with a separate term policy, you would have $84 a month to put into an account that earns, say, 1% or 2%. It will take a decade for the universal life account to catch up to the ordinary savings account, and if you’re looking at that kind of timetable, you’re better off putting that money into a diversified stock investment (which gives you a solid likelihood of earning substantially more than 4% per year).
In other words, if you’re looking for a short term investment, like an emergency fund, you’re better off with a term policy and a savings account. If you’re looking for a long term investment, you’re better off with a brokerage account and a term policy.
The only advantage that universal policies have is the idea of “forced” savings, in that you’ll lose the policy if you don’t pay in. With a separate savings account, you don’t have that pressure to pay up, so it’s easy to slack off.
If you don’t have a history of keeping up with a regular savings plan, the “forced” aspect of the universal policy is a good option. Otherwise, it’s not a great investment.
Q5: Exchanging money
I am traveling to Europe in a couple of weeks, and I’m not sure what to do about money. I called all my credit/debit card companies, and they all charge a fee for international transactions. It depends on the card, but it’s about 3%. That 3% can add up pretty quickly. Should I exchange all my money before I go, and if so, where should I exchange it? The dollar-euro exchange rate sucks right now, so I want to make sure I’m getting the most bang for my buck.
Almost every exchange you do will have some sort of fee attached to it. If you find an exchange that’s fee-free, you’re probably getting an awful exchange rate. Businesses have to make a profit on the exchange. They’re providing a service and you have to pay for that service.
Although you have to check on the current rates, the best rates are generally those from ATMs. Currency exchange booths often offer a poor exchange rate and a fee on top of that. Banks typically charge a fee, but usually have a good exchange rate, particularly if it’s a large bank that operates in that country.
Unfortunately, you’re probably going to be losing 2-3% on your exchanges when traveling abroad. It’s just unavoidable.