|Source:||Sacramento Bee (CA)|
Question: I am a 74-year-old married woman, thinking about taking out a single-premium $100,000 universal life insurance policy. My husband and I do not need this money to supplement our income, but CDs are paying such low interest rates. Do you have any advice about this idea?
Answer: You may not need the funds to supplement your monthly income, but if you buy this policy, what other cash savings would you have left for emergencies?
If you already have adequate cash reserves in the bank, then it may be appropriate to consider a single-premium universal life insurance policy. But it is very important to understand all the details, including the fees you are paying and when you can make a withdrawal without incurring surrender charges.
While the policy you're considering may have a stated rate of return that is currently higher than what certificates of deposit are paying, that rate needs to be adjusted downward to factor in other insurance-related expenses that CDs don't have.
Also, life insurance policies typically have a surrender charge in the first five, 10 or even 15 years, which may reduce the cash available if you need to make a withdrawal. By putting such restrictions on your deposit, the insurance company is able to offer higher rates of return.
There are circumstances where a life policy such as the one you are considering may be appropriate for your age. But there is also something to be said for safe, liquid emergency funds sitting in a bank account that are instantaneously available should something unforeseen arise _ even if the rates are currently low.
Answer by Susan Soesbe, certified financial planner with Symphony Financial Planning, Davis, Calif.
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