Withdrawal penalties are the downside of annuities

DEAR BRUCE: I need help. I am a 75-year-old widow with little income. My modest home is paid for. I have $40,000 in CDs, but interest rates are dropping to the point where I can't live on the small checks anymore. I have had several salesmen trying to sell me annuities, which will pay a higher interest rate. But are they safe? They are not federally insured. I hope you can help me. — Reader in Arizona

DEAR READER: Annuities are an insurance contract, as safe as the insurance company that issues them. The troublesome part of annuities: If you need to withdraw your money, the penalties can be severe. I don't know that you are going to get enough interest to accomplish what you have described.

Even though you called your home modest, there may be enough equity there to justify a reverse mortgage.

This would allow you to stay in your home for the rest of your life but provide a bit of income, which has no restrictions and absolutely no risk.

Even a 2 percent or 3 percent raise from the interest you can get from the annuity is not likely to make much of a difference in your lifestyle. A 3 percent difference would only amount to about $100 a month. A reverse mortgage may be the way to go. Check with your local bank. I'm sure it can steer you in the right direction.

DEAR BRUCE: I have heard that you can save a lot of money by paying a portion of your mortgage mid-month and then making another payment at the end of the month? Is this true? — Reader, via e-mail

DEAR READER: When you have a mortgage or other loan, you are simply renting money. As long as you hold the money, you pay the rent. If you prepay the loan, you have the use of the money for a shorter period of time, so you have to pay less rent.

On the other hand, what would the money be doing if you didn't prepay? If the investment grows faster than the interest on your mortgage, you would be wise to hold onto that money and not prepay. You must, of course, take taxes into account, both the deductibility of the mortgage interest and whatever income tax might have to be paid on your investment.

DEAR BRUCE: For years, you have advocated taking term insurance over whole life. My children are considering life insurance and are thinking of going with whole life. — E.W., via e-mail

DEAR E.W.: I have said that if you are buying life insurance to solve a money shortfall at death, as opposed to investment purposes, term insurance is the best way to go. Many people see life insurance (the term "death insurance" is more apt) differently.

The notion that this is an investment has some merit and, of course, the insurance guy is going to push further. You can't hate him for that. The reality is that there are better investments around. There are hundreds and hundreds of insurance companies issuing term, so it is necessary to shop. The cost of the same exact coverage can vary demonstrably from insurer to insurer and from agent to agent.

Send your questions to: Smart Money, P.O. Box 2095, Elfers, FL 34680. E-mail to: bruce@brucewilliams.com. Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.

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