Dear Liz: My wife and I are retired, living off her pension, my Social Security, and dividends from blue-chip stocks. At 80, we’d like to travel but need to borrow money for that. I can take a loan against our life insurance at a low rate of around 2%, or opt for a margin loan costing 8.75%. It seems prudent to borrow against life insurance for a $10,000 loan, considering our policy’s face value is $900,000, especially since repayment can come from the death benefit. What should we be cautious about regarding life insurance loans?
Answer: You’re right to seek out information before borrowing. Life insurance loans are indeed based on the cash value of a permanent life insurance policy (like whole or universal life), which grows over time and differs from the policy’s face value intended for beneficiaries.
The flexibility in repayment is an upside, as many policies allow for no payments until death, at which point the loan and interest are deducted from the death benefit. However, a major risk is that the loan amount could outpace the cash value, causing the policy to lapse and leading to potential tax implications.
You might want to explore other funding options for travel—like selling stocks, tapping into home equity, or considering a reverse mortgage. Each choice presents unique benefits and downsides, so consulting a fee-only financial planner for tailored guidance is advisable.
Dear Liz: I have questions about using a debit card for making qualified charitable distributions (QCDs) from an IRA. Many mutual fund companies state that checks from an IRA to qualifying charities qualify as QCDs, whether they’re written by the custodian or by the individual. Isn’t it similar whether one pays by check or debit card?
Answer: You bring up a good point, and I appreciate the chance to clarify.
The original inquiry was about using a debit card for QCDs to organizations that accept online donations rather than checks. QCDs enable tax-efficient donations directly from IRAs without the funds being subject to income tax.
Since custodians generally don’t issue debit cards for IRAs, the individual would need to transfer the amount first to a bank account, but that would make the distribution taxable—QCDs must be directly paid by the IRA to the charity.
Checks, whether from the account holder or the IRA custodian, are valid QCDs if they meet certain conditions: they must come from a traditional IRA, the account holder should be at least 70½, and the annual limit for donations is $108,000 in 2025.
Sending checks can be risky due to mail fraud and theft, so electronic payments are usually safer. If checks are a must, use gel pens since their ink is harder to tamper with, and always hand-deliver checks rather than leaving them in unsecured mailboxes. Keep track of all checks and report any missing ones as soon as possible.
For further inquiries, readers may contact Liz Weston through her site.