A: Yes, you can call Charles Schwab (a brokerage firm) and open an account. But please, did your students learn algebra from Saturday-morning cartoons? Why would you think that talk shows can teach you to invest? Do yourself a favor and join the American Association of Individual Investors in Chicago (800-428-2244). For $49 a year, you’ll get plenty of stock information plus access to investment seminars.
Q: I’ve had a $50,000 Aetna Life policy since 1983, paying $72.50 a month. I recently received a letter from my insurance agent saying that I’ll have to start paying $117. Otherwise the policy will lapse when I’m 78 (I’m almost 70 now). He said I could switch to Transamerica, where I could pay premiums at about my current rate. Would it be better to cash in the policy and invest the money in mutual funds? Doris Feliciano, Apple Valley, Calif.
A: Tens of thousands of policyholders have gotten–or will get–letters like this. You thought your insurance was permanent. Now you find that’s not the case.
The type of policy you have is called “universal life.” You bought it when interest rates were higher than they are today. For your premiums to stay level, rates had to stay the same. Because rates declined, you have to pay more to keep the policy in force.
Your insurance agent should have alerted you to this problem long ago. If you’d handled it earlier, your monthly premiums wouldn’t have to jump so much.
The agent wouldn’t talk to NEWSWEEK (not a happy camper, there). The consultant who looked at the policies for us wants to be anonymous. But the points he made will be useful not only to you but to everyone else facing your dilemma.
(1) Do you still need insurance? If not, you could invest the cash value (about $10,800) in something else. In your policy, the cash earns 4.5 percent, tax-free. That’s better than you’d get from bank CDs, but mutual funds invested in stocks could yield more.
(2) If you still need insurance, can you manage with less? Your monthly premiums could stay at $72 or less if you lowered the policy’s death benefit.
(3) Does your spouse still need insurance? If not, consider canceling your spouse’s policy and retrieving its cash value. You could dump that cash into your own insurance policy to extend its life.
(4) What does it cost to switch? You’d pay a 7 percent sales load, a $6 to $10 monthly fee and a fee for surrendering the policy during the first nine years. You face none of these charges now.
Transamerica currently pays 5.8 percent on its cash value, which is better than Aetna’s 4.5 percent. But it will take many years for that higher rate to offset your costs. You might never recoup your costs if Transamerica drops its interest rate. What’s more, if rates drop, this policy might lapse, too. Did your agent tell you that?
Q: I’m taking classes at a local university. I believe I can use my Individual Retirement Account for education costs without paying the 10 percent early-withdrawal penalty. But my bank, which holds my IRA, says the penalty still applies. Timothy Heimbach, Selinsgrove, Pa. A: Letters like yours drive me nuts. Too often, people get bum information from so-called customer-service desks. No one expects bank employees to carry the tax code in their heads. But they should have manuals where they can look the answers up. A higher-up at your bank said, oops, you’re right. No penalty applies.
For the benefit of everyone whose early withdrawals are penalty-free, here’s how the tax reporting works: at tax time, the IRA trustee will mail you Form 1099-R (copy to the IRS). A box on the form shows a “distribution code.” A “2” means that no penalty applies. A “1” means there may or may not be a penalty. Most forms are coded “1.” In that case, just file Form 5329 with your return and the penalty won’t be charged.
Q: I own a two-family house. I occupy one apartment and the other used to be rented out. For the past five years, I’ve occupied both apartments. If I sell, do I owe a capital-gains tax on my profit? Philip Tepper, Brooklyn, N.Y.
A: Not if you have converted the rental apartment to personal use, says Tom Ochsenschlager, a partner in the accounting firm Grant Thornton in Washington. Gains on a rental unit are taxable. But once it becomes your home (for at least two of the past five years), married couples can take up to $500,000 in profits tax-free, and singles, up to $250,000. You have to be in the apartment for that period of time, as opposed to letting it stand vacant.
The story would be a little different if you had rented the unit for any period since May 6, 1997. The depreciation you took since that date could be recaptured and taxed. Sigh. Nothing stays easy.
