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16-04-2006
Buying
insurance with mortgage money bad idea
By
SCOTT HANSON
Q:
I'd like to refinance my mortgage and debt. I have a monthly payment
of $1,000 on my mortgage and about $130,000 in credit card and student
loan debt. The student loans are still on deferment, but I'll have to
pay them back at some point. The monthly payment on the credit card is
about $650. I'm just getting by. I'm never late on my payments, but I
don't have a lot left over.
A
friend just told me about refinancing with a variable-interest loan
that gives me the ability to have a choice of four different payment
amounts each month. I decide which payment I can make.
If I make the
full payment, great. Otherwise, instead of paying the whole mortgage
payment, I put some of that money into an indexed universal life
policy. That way I'm paying the principal and using some of the
interest to actually save money for my retirement.
Have you heard
of this? Is it legal? Is it a good idea? Any help would be greatly
appreciated. -- GM, via e-mail
A: Has the
world gone mad? I thought I'd seen it all until someone presented this
concept to me a few months ago. What will mortgage and insurance
salespeople think of next?
Here's what I
think: I think using an adjustable pick-a-payment mortgage plan in
order to fund a life insurance policy is insane. Insurance products
are supposed to make our lives more secure by giving us protection.
But moving from a fixed-rate loan to an adjustable-rate mortgage just
to buy life insurance adds a great deal of risk to your life.
A big problem
with the "option" mortgage is that paying your full interest and
principal each month is just that -- an option. You can pay your full
interest or you can take the money that was going toward your finance
charges and go blow it on something else.
From my
experience, most people do not have the discipline for an option
mortgage. There are always competing needs that come up.
I've seen
countless situations where people had great intentions on applying
extra cash to a mortgage payment each month but opt for the minimum
payment the majority of the time.
If you go for
the option mortgage and don't pay enough interest, your loan balance
will grow over time and your mortgage payments then could skyrocket.
If you think
you're having trouble making ends meet now, imagine what your life
would be like if your mortgage payments were increased by a great
deal.
You've got some
serious debt that you need to pay off. Get a plan in place to pay
those bills off and forget about the exotic mortgage.
Q: A while back
you advised a recent retiree to transfer his 457 to an IRA to provide
his heirs with tax-deferral advantages. If the retiree doesn't have
earned income (compensation as defined in IRS rules for IRAs), can he
still establish that IRA and roll over the 457 assets into it? --
Hans, Sacramento
A: You bet!
Individuals do not need to have earned income in order to establish an
IRA. They need earned income only if they want to contribute new
dollars to that IRA.
Money
transferred, or rolled, from one plan to another does not add new
money to the mix and can be done regardless of employment status.
---Scott
Hanson, CFP, is a senior adviser with Hanson McClain, an investment
advisory company and registered principal with Securities America,
member NASD/SIPC. E-mail questions to
questions@moneymatters.com.
Source: Courierpress.com
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