J.T., JACKSONVILLE, FLA.
A:
In Florida, it’s a no-brainer, says financial planner Harold Evensky of Coral Gables. Go for the state’s Prepaid College Program. You pay small sums now to cover future tuition and dormitory costs at a state school. Your savings are guaranteed to cover the price, no matter how high inflation gets. If your child attends a private college in the state, the plan pays the school the equivalent of state-college costs. You also get money for an out-of-state school.
For parents in states without prepaid programs, Evensky suggests an automatic investment plan that moves money every month from your bank into a mutual fund. For small accounts, he likes funds that follow a stock-market average. For your level of savings, call the Schwab 1000 Fund, which invests in the largest 1,000 companies (initial investment, $1,000; minimum monthly payment, $100; 800-526-8600).
In 1987, at the urging of my estranged husband, I put $10,000 into a single premium whole life-insurance policy with Summit National Life Insurance Co. in Ohio. Summit transferred the policy, without my permission, to Equitable Beneficial Life Insurance in Pennsylvania. EBL is now in liquidation. I was planning to borrow against my cash value, but a letter from the liquidator says that loans are granted only in hardship cases. I’m 71 and disabled, and have no other savings.
RUTH ABELLERA, SALISBURY, MD.
A:
The critic H. L. Mencken once wrote that everyone “must be tempted, at times, to spit on his hands, hoist the black flag and begin slitting throats.” This may be your time. So much went wrong that your saga is worth printing as a cautionary tale.
First the good news: your policy is protected. A new insurer will be coming in, says Joseph Hartley, counsel for the Pennsylvania Life and Health Insurance Guaranty Association (PLHIGA). PLHIGA cut the interest rate on EBL’s policies, but you lost only $234. Your current account value: $16,786.
The big surprise is that you could have gotten money several weeks ago. Since the beginning of August loans on EBL policies have been granted to anyone who asked. But PLHIGA (supposedly the policyholder’s friend) didn’t make a general announcement. The reason: to avoid too many disbursements before the sale, says Karen Hunt, Summit’s chief operating officer. So you and others have been worrying unnecessarily (grrrrrr). The moral: if your insurer fails and you need cash, keep hitting the phones. Squeaky wheels may get paid.
Another moral: cheek your company’s safety rating every year. When you bought, Summit carried an A rating from the insurance evaluator A.M. Best. The following year it dropped to A- and then lost its rating entirely. Equitable Beneficial was rated below minimum standards at the time of the transfer, but policyholders weren’t informed. There needs to be a law requiring disclosure.
Under common law, you could have refused the policy transfer, says insurance professor emeritus Joseph Belth of Indiana University. But no one told you that, either. Not that it would have made any difference. Summit National went under, too.
The irony is that you didn’t care about the insurance. You wanted a tax-deferred retirement investment with the money available any time. Insurance lets you borrow against your investment, tax-free. But you can’t take all the money and still keep the policy in force. If you borrow. too much and don’t pay it back, the insurance will lapse and you’ll owe a tax. For you, a tax-deferred annuity might have been a better fit. I note with interest that your husband was the agent and is also the policy’s beneficiary. He says you can list any beneficiary and that it’s a suitable investment.
What is the optimal way to save for a down payment on the house I want to buy next year? I have $6,000 in personal savings and $14,000 in my tax-deferred 401(k) plan (to which my employer does not contribute). I can save $12,000 more in the next 12 months and am going to need $20,000 cash. Should I keep contribution to the 401 (k) to reduce my tax and then withdraw the money? Or should I save outside the 401(k)?
KEYIN BARNEY, PLAINVILLE, MASS.
A:
To save taxes or not to save them. What a dilemma. Every redblooded American wants to keep every dime he can, but in your case, saving taxes is going to cost you some ready cash that you’re likely to need. I asked Peter Elinsky, a partner in the accounting and consulting firm KPMG Peat Marwick, to explain to you–and everyone–how to make this decision.
The first rate, Elinsky says, is not to put any money into a 401(k) for just a year. Cash withdrawals carry a tax penalty of 10 percent, if you’re under 59 1/2. That more than erases the value of earning a year’s worth of interest. It may erase any employer contribution, too. But it’s OK to borrow from a 401(k). Your plan calls for repayment at 7 percent interest (non-tax-deductible) over five years–and you pay the interest to yourself.
The question is, can you borrow enough? Under the law, a loan from a retirement plan normally can’t exceed half the assets or $50,000, whichever is less. So only half of this year’s contribution will be on tap for your down payment.
There are the principles; here’s the math for $12,000 in savings: (1) If you use the 401(k): Your maximum contribution is roughly $9,000, raising the total in your plan to $24,000 (including interest earned). That will allow you to borrow $12,000. The rest of your savings, adjusted for interest and taxes, give you just over $8,000. So you reach your $20,000 goal but have nothing for contingencies.
(2) If you put all the money in the bank: With a smaller 401(k), y. Japanese corpoly $7,000. But csui evacuated far after-tax savings, plus interest earned, you’ll have roughly $21,260, Elinsky says–nearly $1,300 more. And take it from people who have been there: those dollars will be spent by the time you close on a house.
Send your questions to Jane Bryant Quinn, NEWSWEEK Focus: ON YOUR MONEY, 251 West 57th Street, New York, N.Y. 10019
