Dear Quentin,

My dad bought a life-insurance policy for me when I was a child in case I “kicked the bucket” and he had to cover burial expenses. He turned the policy over to me when I became an adult and I have been paying the annual premium now (which is really low) for over three decades. I am now in my 50s and have no family. I have no children, no siblings left, etc.

The cash value of the policy is around $12,000 and it’s set to renew this September. I was thinking about cashing it out, and using the money to max out a SEP or Roth IRA for the year. Can I max out both? Or only one? If I have anything left over, I plan to buy some Treasury bonds or put it in a high-yield savings account or CD.

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A representative at the insurance company said one option is to cash out in two chunks over two years to help with tax exposure. It’s hard for me to trust any advice coming from the insurance company because their No. 1 priority is their own best interest. Do you have any advice on the best way to cash out the policy?

Last year, I was hospitalized due to blood poisoning from a feral-cat bite — and the copay wiped out my savings, so it would be great to rebuild them.

No Longer a Feline Friend

Related: ‘I’m weary of repeating myself’: How do I deal with rich friends who take $22,000 cruises and book $800 hotel rooms? Prices are crazy enough already.

Dear Friend,

I feel as sorry for the cat as I do for you.

That sounds like quite a dramatic trip to the hospital, but it’s a cautionary tale for anyone reading your letter to take animal bites seriously, due to the risk of tetanus and rabies, and deal with them right away. Even scratches can lead to bacterial infections. Cats in the U.S. are more likely to be rabid than dogs, according to Johns Hopkins.

Whether you cash out now depends on the long-term prospect for your life-insurance plan and your financial situation. You’ve been through a lot with your health in recent times, so my only advice to you is to not make any hasty decisions. Sometimes, taking no action — for now at least — is the course of action worth taking. That said, $12,000 is a lot of money.

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And if you did decide to cash out? You should be able to snag a 5%-plus APY on high-yield savings accounts in the current environment. And yes, in addition to CDs, other options with zero or close-to-zero risk include high-yield savings accounts and short-term Treasury bills. Money-market funds are also extremely low risk.

It’s very easy to buy Treasury bonds without fees or commissions. Check out the U.S. Treasury’s tentative auction schedule. Auctions for 3-year, 10-year and 30-year bonds are typically held quarterly, but you can keep abreast of auctions for longer-term paper. You can also see a more detailed schedule here.

Under Internal Revenue Service rules, contribution limits for a SIMPLE IRA plan (or Savings Incentive Match Plan for Employees) — for which you need earned income — are separate from the limits for your SEP plan. “Assuming you are not also an owner of your employer’s business, you can contribute the maximum to both plans,” the IRS says.

It’s always advisable to have an emergency fund of at least six months’ worth of living expenses and, as you suggest, due to persistently high interest rates you can still get a good return on high-yield savings accounts and certificates of deposit. CD rates typically track the federal-funds rate, and currently offer annual percentage yields of up to 5.36%.

Inflation continues to cool — it hit 3.4% on the year in April, down from 3.5% the previous month, according to figures released this week — and unemployment remains low. Economists are speculating that any recession will likely be a mild one. So the interest rates you can get on CDs and savings accounts are still (happily) outstripping inflation.

Cashing out a life-insurance policy

You should not have to pay tax on the premiums you have paid, but rather on the dividends and interest on the life-insurance policy itself. So cashing it out later is more likely to result in you having earnings for which you would be taxed. The IRS gives more details on the tax implications on cashing out life insurance here.

A life-insurance agent, if that’s the only license they hold, may not necessarily have a fiduciary duty to put your interests if they are selling you a policy. Despite what the agent told you, cashing out could be taxable whether in installments or not. You need to know the actual cash value, total premiums paid and any surrender charge.

On a separate note, a new Department of Labor rule, due to take effect in September, broadens the reach of fiduciary obligations under the Employee Retirement Income Security Act of 1974 to help ensure that the client’s goals and accounts are given precedence over the agent’s financial interests. (It covers investment advice rather than insurance-policy sales)

“An investment-advice fiduciary is no longer limited to persons who provide advice on a regular basis pursuant to a mutual agreement that the advice will serve as the primary basis for the retirement investor’s investment decision,” according to JD Supra, a legal-publishing service. It applies to broker-dealers, advisers, banks, and insurance companies.

“Significantly, these changes now extend fiduciary status to ‘one-time’ advice, including advice related to rollover transactions,” it adds. “Given the removal of the mutual-agreement requirement, the final regulations clarify that fiduciary status would not apply to providers marketing their own services, absent an investment recommendation.”

In a congressional hearing on Capitol Hill earlier this year, Susan Neely, president and chief executive of the American Council of Life Insurers, called for the new rule to be withdrawn, arguing that Americans would “have more lifetime income options to ensure that they do not run out of income in their retirement” without it.

For now, however, you are primarily concerned with a life-insurance plan. Without any beneficiaries, what is the need for this policy? Assuming you won’t need $12,000 for burial expenses, you may be better off cashing it out. Take a few weeks or more post-bite to rest up, seek out third-party advice from a CPA, and review all your options.

As for your sobriquet, “No Longer a Feline Friend,” never say never, a less frightened cat could creep up on you just when you least expect it.

Previous columns by Quentin Fottrell:

‘They left nothing except junk’: My brother and his wife emptied our father’s house. It stands empty years after his passing. What now?

‘Is this creepy?’ I want to give my 13-year-old daughter her late grandfather’s iPhone. A refurbished model costs $200.

My father ‘deliberately and hurtfully’ cut my late sister’s two kids out of his will. How can I ensure they get their fair share?

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