Dear Mary: My husband has a $50,000 term life insurance policy. He is 57 and a smoker, and the premium is quite high. He has an additional $10,000 death benefit at work. The value of the policy keeps going down, while the premium climbs. He pays $57 a month for the coverage. We have an IRA worth over $100,000 but plan on spending some when he becomes 59 1/2 to buy a bigger home. What should we do? -- Anne, Massachusetts
Dear Ann: First, you need to understand the purpose of life insurance. It is to replace income for dependents that would be left in financial hardship upon the death of the breadwinner. The theory is that as a person gets older, the need for life insurance diminishes as dependents become independent and one's estate grows. I cannot give you specific advice because I do not have enough information, but it is possible that the $10,000 employer-furnished policy is sufficient at this point in his life, freeing that $57 each month to be redirected into an investment vehicle that would work harder for you.
Whatever you do, do not cancel that $50,000 policy without first getting advice from a trusted advisor. Generally speaking, at the peak of a family's need for life insurance, the amount should be equal to six to eight times the breadwinner's annual income in a term insurance policy. The theory is that the proceeds of the policy would enable the family to maintain the lifestyle they had prior to the death.
Dear Mary: My husband and I are working on becoming debt free. Our major debt is our house payment. Would you suggest refinancing the loan while the rates are low? -- Megan, California
Dear Megan: Refinancing is not always advisable, even when you could get a lower interest rate. There are many things to consider. First, don't even think about refinancing unless you could reduce the rate by at least 2 full percentage points. Next, determine the costs you will incur by refinancing. There may be "points" (loan fee), an appraisal fee, document recording fees and so on. If you cannot recoup those costs within two years in the difference between the old and new monthly payments, it's probably not a wise move.
Even if you can get a significantly lower interest rate and the fees are low, refinancing might be a big mistake based on the big picture.
Let's say you've had your current 15-year mortgage for seven years. You've built a nice amount of equity and will own it in just eight more years! Refinancing into a new 15- or 30-year mortgage might give you a much lower payment, but in the long run you will pay a great deal more given the new terms. Look beyond the monthly payment. If you can refinance for the same term you have remaining, end up with a lower monthly payment and recoup the associated costs within two years, hurray! That would be a terrific deal.
Do you have a question for Mary? Email her at firstname.lastname@example.org, or write to Everyday Cheapskate, P.O. Box 2099, Cypress, CA 90630. Mary Hunt is the founder of www.DebtProofLiving.com, a personal finance member website and the author of "7 Money Rules for Life," released in January 2012.