Suze Orman on bringing down debt and keeping up with insurance hikes. Plus, a safer option for your retirement funds.
By Suze Orman
Q: Over the next year, I'm planning to dig my family out of $26,000 worth of debt. We'd pay it down with $2,000 a month from my husband's salary plus my earnings from a part-time job. But would it make sense to take out a personal loan so I can pay off the bulk of the debt ($18,000 in student loans at 6.38 percent interest)?
Suze: I love that you're attacking your goal, but I wouldn't recommend taking on more debt to speed your timeline. You've come up with an approach that should have you back on your financial feet quickly, making a new loan unnecessary. What's more, the average interest rate on a personal loan is around 10 percent -- well above the rate you're paying. If your circumstances change and it becomes difficult for you to follow your current aggressive repayment plan, you can always slow down. But if you take on another loan, you'll have to maintain a strict schedule: Failure to make timely payments could ding your credit score.
Q: My husband and I have long-term care insurance, and our premiums just increased significantly. We're still employed full-time, but I'm worried we won't be able to afford additional rate hikes after we retire in a few years. Should we drop our current policy and buy a hybrid life and long-term insurance plan with fixed premiums?
Suze: Unfortunately, insurers have discovered that the claims they pay for long-term care policies greatly exceed the premiums they collect. As a result, they're raising prices on current policies, sometimes by more than 40 percent.
But I don't think you should replace your long-term care insurance right now. You may have to forfeit the premiums you've spent years paying. Plus, hybrid plans have separate layers of fees for the long-term care coverage and the life insurance.
I'm also inclined to think you may still be getting a good deal -- even with another price increase. According to the American Association for Long-Term Care Insurance, the average annual cost of a policy purchased by a couple in their mid-50s is about $2,500. A 50 percent premium hike would mean only an additional $100 or so a month. I'm not minimizing the angst that comes with rate increases, but you have to weigh them against the future cost of care.
I'd advise you to sit down with your insurance agent. You may be able to make your current policy more affordable by changing some coverage -- say, increasing the length of the waiting period before your benefits kick in. If you have adult children, talk to them, as well. They may be thrilled to cover the cost of an increased premium today in exchange for guaranteeing their peace of mind in the future.
Q: My financial adviser suggested that I invest in index annuities. Are they safe?
Suze: I'm not a fan of index annuities. These financial instruments, which are sold by insurance companies, are typically held for a set number of years and pay out based on the performance of an index like the S&P 500. (Be advised that insurers aren't necessarily transparent about how they calculate any gains credited to your annuity.) They do offer a guaranteed return, but it can be under the rate of inflation, and there are caps on the amount of interest you can earn. Plus, if you don't want to keep an annuity for its entire term, you could lose 10 percent or more of your investment to a surrender charge. Honestly, I'd be suspicious of any adviser who wants you to go this route. Instead, I'd recommend that you stick to your workplace retirement plan, if you have that option. You can contribute up to $17,500 this year ($23,000 if you are at least 50). If you don't have a company 401(k) or you have more funds to invest, you can set aside $5,500 ($6,500 if you are at least 50) in a traditional or Roth IRA.
Suze Orman's latest book is The Money Class: How to Stand in Your Truth and Create the Future You Deserve (Spiegel & Grau).