It’s another Q&A Edition of Optimal Finance Daily: Episode 1614. and I’m your host and personal finance enthusiast, Diania Merriam. Today's questions are on investing is an HSA and universal life insurance.
We are going to change it up like I do once a month or so, and address some audience questions. A quick disclaimer: just like all the content shared here, this is for informational and entertainment purposes only… or “infotainment” if you will. I’m not a certified financial planner, and encourage you to take my opinions with a grain of salt.
And if you want to send a question in to be answered here on the show, just send a message to finance AT oldpodcast.com
But for now let’s get to today’s questions and start optimizing your life!
Listen to Diania answer these questions on Episode 1614 of Optimal Finance Daily.
Personal Finance Question 1: “How Do I Invest with a Health Savings Account (HSA)?”
Our first question comes from Jessica who says:
“My question is about HSAs and how to invest that money. More specifically, my husband and I recently opened an HSA through Lively which gives us TD Ameritrade as our investment account. We've made deposits into the HSA and transferred $1000 of it for now into TD Ameritrade, but now I don't know what to do. It looks like I have to pick the stocks I want to buy and decide how many.
Help! I have no idea what I'm doing here and it's certainly overwhelming to look at all the different prices and options! It all seems like a different language.
Could you provide a little guidance on where to begin?”
DIANIA MERRIAM: Thanks so much for your question Jessica, and congrats on opening an HSA! An HSA or health savings account is a fantastic investment vehicle that not enough people know about.
You’re eligible to open an HSA if you have a high deductible health insurance plan, and while it’s designed to help you cover health care costs, the money you save in your HSA can also be invested. The cool thing about HSAs, is that the money is invested pre-tax, it grows tax free, and it can be used for eligible healthcare costs without paying taxes or penalties. Also, after 65, you can use HSA funds for anything penalty free, you’ll just need to pay income tax on it, similar to any other tax deferred retirement vehicle.
So back to your specific question on how to invest your HSA, let me share with you what I did. Every HSA provider has different rules, so I would first check if you have any requirements to keep a certain amount of your HSA liquid in the Lively account and not invested. I mention this because I was required to keep enough cash in my HSA to cover my health insurance deductible, and after that, I could invest the rest.
Even if it’s not a requirement, you might consider doing this just in case you have a need to tap into this account for medical expenses. If it’s all invested, you could potentially have to sell some investments at a loss in the event you need to tap into this account. Remember that an HSA is just a vehicle for investment, just like your Roth IRA or 401k vehicles. I like to think of these vehicles as different buckets where I invest my money, and the water in the bucket is the investment.
For me personally, I have the same water in my various buckets – and that water is low fee total market index funds or ETFs. So when choosing the investment for my HSA, I looked at the options available that were the most similar to the Vanguard index funds I have in my other vehicles.
It looks like TD Ameritrade offers index funds and ETFs from both Vanguard and Fidelity, and there is a nice comparison tool through the TD Ameritrade website. So if I were you, I would look at the funds I’m investing in through my other vehicles and see if they are available through TD Ameritrade.
I’d also Google ticker symbols for total market index funds and efts and use the TD Ameritrade comparison tool to look at the expense ratios for the options available to you through your HSA.
We’ve talked on this show about VTSAX which is Vanguard’s total market index fund, and the ETF equivalent to that is called VTI, so that could be a good place to start for your research.
I personally have my HSA investing in FZROX through Fidelity which is a zero fee total market index fund. I hope that helps!
Question 2: “Should I Keep Contributing to My IUL?”
Our next question comes from Madison who asks:
“Should I keep contributing to my IUL (indexed universal life insurance)?
Background: My dad is a financial advisor, with a specialization in retirement. When I was 23, about 8 years ago, he had me sign some paperwork. He told me it was for insurance. Since my brother died at a very young age, my parents had life insurance policies for us since we were about 18. So, I thought these papers were for my life insurance policy and relied (perhaps mistakenly) on my dad’s recommendations. After all, he is my dad and I certainly didn’t know much (or care) about insurance at 18 years old.
I’m 31 now and I have always contributed a little amount to the IUL. Now that I have started doing my research, I’m worried about this as an investment tool. I have life insurance through work so I know this isn’t a primary life insurance policy. I make a decent 6-figure salary and wonder if this Indexed universal life insurance is worth riding out given that I have been contributing to it for 8 years. Unfortunately, getting any information about this account is like pulling teeth.
Is there a threshold I should have for either maintaining or abandoning this ‘investment tool'?”
DIANIA MERRIAM: Thanks so much for your question, and I totally understand how confusing it can be to make money moves after you’ve been locked into something for a while.
I think the first thing to address is your comment about it being like pulling teeth to get any information on this insurance policy. Before you’re going to be able to make a decision, you’re going to need to understand more about this policy.
If I were you, I’d call the insurance company and ask for the original insurance contract, any riders that were added, and the annual statements they have available.
William from our Facebook group commented on your question saying: “So much of the answer to your question really depends on the quality of the policy and the funding level of the policy. Knowing things like the cash value, the insurance coverage, the fees and interest rates associated with features of the policy… like a loan against the cash value, the specifics of how the policy indexing works (such as whether there's a cap on investment returns) and any riders that might exist.
This will all go into the determination of whether you would be better off cancelling the policy, maintaining the policy at current contribution levels, or perhaps even over-funding it.”
Frank from our Facebook group also weighed in and said: “The biggest question is when can you stop contributing to it without it lapsing and perhaps causing a taxable event. That is often the best course when you have had something for a while. But this information should be available from the company in the form of an updated illustration and the annual statements.”
At the risk of insurance salespeople coming at me, for the large majority of us, insurance products aren’t great investment vehicles so I can see why you would want to look into this further. It sounds like you don’t have any dependents which is the main reason I see for having life insurance in the first place, to support your dependents in the event of your untimely death.
Indexed universal life insurance policies are extremely complex and the people who sell them typically are highly trained sales people that make fantastic commissions off these products.
If I were you, I’d get the information from the insurance company and hire a flat fee advisor to dig further into the policy for the best course of action.
HAS Investments and Universal Life Insurance: Sign-Off
I hope you enjoyed another Q&A edition of Optimal finance daily.
If you have a question you’d like addressed on the show, go ahead and send it over to finance AT oldpodcast.com
I hope you have a great rest of your day, and I’ll see you tomorrow, where I’ll be back narrating your favorite authors, and where your optimal life awaits!
Listen to Diania answer these questions on Episode 1614 of Optimal Finance Daily.
