Ask The Expert

Questioner: Lisa

Question: Hello,
I am permanently disabled and have a question regarding my IRA and my Life Insurance Policy. I have approximately $19,000 in an IRA account and I have a life insurance policy that I no longer have to pay the premiums on because of my disability --- the premiums are paid due to an accident / disability clause in the policy and I received dividends on that policy every year as well.

I am in need of cash and know that I can cash in the IRA and not be subject to the 10% early withdrawal fees but an not sure if I should cash that in or cash out the life insurance policy. The life insurance policy will automatically begin making distributions to me when I turn 65 which will last for a minimum of 10 years.

Would I be better off to cash in the IRA or the Life Insurance Policy --- both from a standpoint of future income disbursements and in regards to the taxes that would have to be paid? Also, exactly what is required to prove the disability for the IRA. I am currently 48 and on SS Disability and do have the final award letter stating the permanent disability. Any information would be greatly appreciated. Thank You,

Answer: Thank you for your question and I hope I can offer some assistance in the answer. Although you provided good information, there are small details that are missing and are usually needed in order to provide a comprehensive answer. Such details refer to your current income sources and amounts, what type of life insurance and what company, are you married, are there other family members that could be affected by the decision, what is your need for life insurance in your life, are there other assets available, is this a Roth IRA or Traditional IRA, have you made any post tax contributions, how much money do you need to take out, etc.

But assuming I take your question as is, I would first contact the life insurance company and ask them the following questions:

1. What are the loan provisions of the policy?
2. What are the withdrawal requirements of the policy?
3. Does a loan or withdrawal affect the face value of the policy?

Depending on what the answers are to those questions could be a determination as to where you may want to take a withdrawal from. Either your IRA or your life insurance.

Your life insurance could possibly be the most tax efficient asset from which to withdrawal money from due to the fact that you might either have the ability to withdrawal your basis or take a loan from the policy.
However, if you withdrawal your money from the life insurance policy, it could definitely affect those future guaranteed withdrawals you stated and/or the policy's face value if you were to pass away.

Assuming also that you have no other income other than s/s disability, taxes from an IRA withdrawal should not be of too much consequence since you would have much of your either itemized or standard deductions and exemptions either eliminate or significantly reduce the tax owed. Since you have all the documentation that you are disabled you should be OK and would not need to pay the 10% early withdrawal penalty.

Disclaimer | Privacy Policy | FAQS | Forms