Okay, let’s break down teh advice โregarding the lifeโค insurance loan versus margin loan, and then the clarification on Qualified Charitable Distributions (QCDs).
Life Insurance Loan vs. Margin Loan – Analysis
You are absolutely right to question which loan makes more sense.Based solely on the interest rates provided (2% vs. 8.75%), the life insurance loan is substantially cheaper. Your reasoning is sound: a low-interest loan secured by an asset you already own,withโ the potential for the loan to โคbeโ covered by the death benefit,is very attractive.
However, the article does point out โขsome important pitfalls, and these are crucial to consider:
Policy Lapse: This is the biggest risk. If the loan plus accrued interest grows larger than the cash value of your policy, the policy could lapse. โขThis means you lose the insurance coverage and the cash value.โ Furthermore, a โคlapsed policy can have tax implications (see below).
Reduced Death Benefit: Even if the policy doesn’t lapse, the outstanding loan balance (plus interest) will beโฃ deducted from the death benefit paid to โyour beneficiaries. This is what the article means by “leaving a beneficiary short of funds.”
Tax Implicationsโฃ (if policy lapses): If the policy lapses and theโ loan amount exceeds the cost basis of โขthe policy (the premiums you’ve paid), the excess could be considered taxable income. Impact on Cash Value Growth: โthe cash value in your life insurance policy grows over time. Taking a loan reduces the amount available to grow, potentially slowing downโข the accumulation of future cash โคvalue.
To make a fully informed decision, youโ need to:
- Understand your policy Details: Carefully review yourโ life insurance policy documents. What are the specific terms of the loan? What is the maximum loan amount โyou can take? What happens if the โloan balance exceeds the cash value?
- Calculate the Impact: โข Project โhow the loan and interest will affect your policy’s โcash value over time. Consider different โคrepayment scenarios.
- Consider Your Repayment Plan: You mention regular cash flow. Havingโ a solid plan to repay the loan is essential to โavoid the pitfalls.
- Consult a Financial advisor: The article correctlyโ suggests talking to a fee-only financial โplanner. They can โคassess your overall financial situation and provide personalized advice.
Qualified Charitable Distributions (QCDs) – Clarification
The follow-up letter andโ Liz Weston’s responseโฃ clarify a very important โคpoint โabout QCDs. โYou are correct to point out the apparent contradiction between whatโข some mutual fund โฃcompanies say and Weston’s initialโ answer.
Here’s the key โtakeaway:
Direct Transfer is Crucial: To qualify as a QCD, the money must go directly from โคyour IRA to the charity. It cannot pass through โฃyour hands.
Debit Card/Bank Account = Taxableโค Distribution: If you have the money distributed to you (even temporarily, via your โคbank account), and then use a debit card to donate, it’s no longer a QCD. It’s considered a regular IRA distribution, and you’ll owe income tax on it.
Checks are Okay: Checks drawn directly from your IRA (either โขby you or the custodian) and sent to theโ charity are acceptable QCDs.
Security Concernsโ with โขChecks: โข Weston acknowledges the risk of mail theft and check fraud and provides good advice on mitigating those risks (gel pens, post โoffice, monitoring).
In essence, the convenience of usingโค a debit card for online donations is not worth losing the tax benefits of a QCD. You need to find โคcharities that accept direct transfers from IRAs or stick to checks.
Overall:
Theโ advice in the article is generally sound, but it’s important to โdig deeper and do your own due diligence. Don’t rely solely on the stated interest rates; consider โฃthe potential risks and long-term implications โคof each option. And always seek professional financial advice tailored to your specific circumstances.