I am an 81-year-old divorcee with no children and in relatively good health. I have $72,000 in an income-producing account, from which I receive about $170 a month. I also receive $1,350 per month from Social Security. I have a $24,000 IRA account from which I make a mandatory withdrawal of $1,300 per year.
But I also have a $65,000 home mortgage at 5.75 percent with a monthly payment of $411, excluding escrow. My question: Do I pay off my mortgage? — J.M., by email
Paying off the mortgage would make a material difference in your life, but it also presents a hazard. The material benefit is that you’d no longer have a mortgage payment of $411 a month. Since some of the cash for the payment is the $170 a month you are taking from your $72,000 savings account, your spendable income would rise by the difference, $241 a month. That would make it a lot easier to get through the month.
The hazard is that paying off the mortgage would reduce your financial assets quite a bit — it would take your savings account down to $7,000 from $72,000. Your only other financial resource is your $24,000 IRA account.
If the value of your house is a good deal greater than your $65,000 mortgage, I’d like to suggest another path. This would be to replace the mortgage with a home equity line of credit in the same amount. These are available in the current market, interest only, for as low as 3.5 percent. They generally can be done without paying any costs.
So, you could replace the first mortgage with an interest-only line of credit. This could reduce your monthly payment from $411 to an interest-only payment of about $190.
Currently, credit unions are the best source for these low-cost loans. The catch here is that home equity lines of credit are variable-rate loans.
I agree with your assessment of variable life insurance. But what about using indexed universal life insurance? Is it a better deal than an index fund equity investment? It provides tax-free income but has an insurance cost. But what if you need some insurance anyway? What is your assessment? — W.H., by email
If you are in that relatively rare group of people facing estate taxes or a long-term commitment such as insurance related to a divorce contract, then some form of cash-value insurance is a very good tool. Basically, it can function as a conservative, but tax-benefited, part of your overall portfolio.
Indexed universal life insurance doesn’t expose you to the market risks of variable universal life insurance, but its returns likely will be closer to the return on the general account of whatever company issues the policy than that of the stock market. Also, while you’ve eliminated the exposure to market risks of variable universal life, you haven’t eliminated the heavy baggage of having life insurance costs charged against your principal as well as the high costs of the investment itself.
For those reasons, I think the vast majority of people should buy a term life insurance policy covering a long period, in a generous amount, when they are young.
The reason to do this is simple. Term life insurance is very cost-efficient. Low-cost index funds are very cost-efficient. Policies that mix life insurance and savings are not.