My mother has bad health and wants either life insurance or burial insurance, or she wants to start an IRA.?

Question

She wants to do this to help me offset the burial expenses for her. I think she is uninsurable due to the fact that she is diabetic and her a1c numbers are out of control. I think an IRA would be better, but I don't know how they work and where to get started.

Answer 1

Comparing an IRA against life insurance is about net rates of return.  After taxes, the life insurance tends to be a better deal in the short term, and IRA's tend to be better in the long term.  It depends largely on the insurance programs you can find and the financial instruments in the IRA.  A fee-only financial planner might be able to answer this question better.

Financial Representative:  She asked about an IRA which already grows tax deferred.  An annuity's tax deferred status would offer no additional benefits to her at a potentially higher cost.  

You often talk about the high cost of permanent insurance.  How about the cost of putting insurance instruments in retirement accounts?

Answer 2

On her situation, a variable annuity should be an option for her. In variable annuities, it solves the problem of dying too soon or living too long. The money grows tax-deferred and if she dies before she starts withdrawing money from it, it will pay a minimum death benefit by the amount she contributed into it. If there's gains on her investments, those gains will be added on top of the minimum death benefit. So, if she invested $10,000 into a variable annuity and something happens to her and her account is worth $20,000, the beneficiary will receive $20,000. If its below $10,000, say $7000, it will pay $10,000 to the beneficiary.

When she decides when she wants to start withdrawing money from it, the variable annuity will pay her monthly for the rest of her life. However, she will lose the death benefit. The amount she will get each month will depend on how the market is performing. So she has to consider the fact that variable annuity can only provide supplemental income just like social security.

IRAs are a great retirement tool because they too grow tax-deferred. There are 2 main types of IRAs for individual persons, which are Traditional IRA and Roth IRA. There are several other IRAs, but those are for small businesses.

Some rules you should know about for all IRAs:

Rule #1) Withdrawals before age 59 1/2 are usually subjected to 10% early withdrawal penalty. Withdrawals that are not subjected to 10% penalty before age 59 1/2 are:

1) You may make withdrawals before age 59 1/2 if you become permanently disabled.

2) If you die before age 59 1/2, your estate or your beneficiary will not be affected by the rule.

3) You may make withdrawals to pay for non-reimbursed medical expenses IF AND ONLY IF the expenses exceeds 7.5% of you adjusted gross income (AGI, which means your gross income after all qualifying deductions are made)

4) You may make withdrawals up to $10,000 for purchase, building, or rebuilding of your first home. This can include children, grandchildren, and your spouse if you already bought your first home.

5) You may make withdrawals to pay for higher education expenses. This can include you, your children, and your grandchildren.

6) If you are out of a job and have medical insurance, you may make withdrawals to pay the premium.

Rule #2) Individual must be earning income legally.

Rule #3) In year 2008, individual can only contribute up to $5000 (if you are below the age of 50) or $6000 (if you are 50 years old or older) or 100% of their income, whichever is lesser. So, if your income is $2000, you can only put in $2000.

Here's the difference between Traditional IRAs and Roth IRAs

1) Withdrawals on the gains in the investment are taxable in Traditional IRAs, but not in Roth IRAs.

2) In Traditional IRA, there is mandatory minimum withdrawal after age 70 1/2. So anyone above this age can't open a Traditional IRA. In Roth IRAs, you can keep the money in there as long as you want.

3) Contributions to a Traditional IRA are tax-deductible, but will later be taxed when you start withdrawing. In Roth IRAs, none of your contributions are tax-deductible.

4) Any contributions in either IRA that are NOT tax-deductible can be withdrawn tax-free and penalty free at anytime, even before age 59 1/2.

What should your mom get? I can't really say since I really don't know her situation, besides the fact she don't have good health. I can recommend a company you should look at. There's only one company that fully serves middle income families in America and that's Primerica Financial Services. You should check them out because I'm a client there and they don't charge any fees for their services. They are a member of Citigroup and they specialize in helping middle income families get out of debt, build wealth for long term goals, finding the right amount of coverage for life insurance, and making a financial plan to help clients reach their financial goals.

Answer 3

If your mother's health is not life-threatning the first thing you might consider is to start saving for her funeral with a money market account. A money market account is like a glorified checking account which pays some interest; usually between 4 to 6%. This money should be for her burial only and should not be touched for anything else!!!!!

Money that is put into an IRA is for retirement purposes. There are 2 types of IRA's. One is the traditional IRA. This is where you  get to subtract the money you put into it from your income which helps to eventually lower your income tax liability. You pay taxes on this money when you take it out of your account. The person who owns the IRA must start taking money out of this account the year in which they turn 71 1/2. The other is the ROTH IRA. You do not get to subtract the money you put into the ROTH IRA from your income, but you do not have to pay taxes on it when you take it out of your account. You do not have to start taking money out of this account they year you turn 71 1/2. If your mother puts money into either IRA and she dies before reaching age 591/2, there will be a penalty for taking it out early and the amount taken out will be included in her income, which would increase her tax liability. If you are going to purchase life insurance, buy term insurance. This is where you buy life insurance only without the savings feature. This will help you get MORE life insurance for the money. DO NOT buy any type of policy which has a savings attached to it. It will reduce the amount of life insurance you can purchase for the money you will spend. Also with these types of policies, there are other factors that usually work against you. One is that you would have to BORROW the money which accumulates in the savings portion of the policy (why should you have to borrow money YOU paid into the policy) Another is that you might not get both the savings and the face amount (the amount of life insurance which you would purchase on your mother) in case of her death. So again, either purchase a money market account and start saving the money for your mother's funeral, or purchase term insurance only if you can. I hope this helps you in your decision making.

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Answer 4

Why  doesn't she try to eat the right foods and exercise to get better?

Answer 5

She can only contribute to an IRA if she has earned income.  She should just put her money in a bank account.

Answer 6

Well, that IRA is going to be most affordable.  I don't know how old she is, but she's not going to get good "odds" on life insurance with out of control diabetes.  If she's overweight, that's just one more bad risk factor.

You and she should probably go down to her bank, to talk about the IRA options.  Even if you don't buy there, it's  great, free source of information, where you can ask tons of questions.  Start with her auto/home insurance agent, see if they do life insruance, or ask for a referral to a high risk life person in your area, but I think when you see what the rates are (probably hundreds a month, for not much coverage) you'll probably do the IRA thing instead.

FWIW, once you decide to do the IRA thing, you can do it pretty cheap, or free, from www.schwab.com or many other online companies.  She can have her deduction from her paycheck or checking account automatically.  That's the way to go, IMO.

But before you decide, DO talk to a few people about what it is you're getting, so you guys are INFORMED CONSUMERS.