Unclaimed life insurance policies

Dr. Don,
We were recently notified that my father-in-law, who died three years ago, had a life insurance policy that has not been claimed by the beneficiary. If we sign a contract giving a 20 percent finder's fee on all money collected, the name of the company and how to claim the death benefit will be provided. Is there any way to find out about the existence of active life insurance policies when no one in the family is aware of their existence?
Lost Insurance

Dear Lost,
While you're putting together your taxes this year, make a list of your financial assets and the addresses of the firms holding those assets. Let someone close to you know where he or she can find that list if something happens to you. If you don't have a will, or if you need to update your will, make it a priority to meet with your attorney to execute a will before the end of February.

If your father-in-law had taken these steps, his heirs wouldn't be considering dealing with a firm that is charging a 20 percent finder's fee for them to receive what he intended to give them free and clear.

The good news is that insurance policies don't revert to the government as unclaimed (escheat) property as quickly as other financial assets. You have time to find the insurance policy on your own. Missingassets.com is a great place to start learning how you can discover which company wrote the policy. Unclaimedassets.com can help you search the state's database in the state where he lived. A lot of heir finders make their living by mining these same databases, so you may be able to find out the information without paying a finder's fee.

Don't make this your life's work. If you can't find out anything, tell yourself that 80 percent of something is better than 100 percent of nothing. But don't sign a contract before checking the firm with a state or local Better Business Bureau.

Choosing a mortgage

Dr. Don,
We are first-time home buyers. Our combined income is in the mid-six figures because of company stock options. We have had credit problems in the past, but have been able to pay our bills down to zero. Our credit score is in the mid-600s.

The wide array of mortgage options is confusing. We like the idea of using our investment portfolio as collateral for the mortgage rather than selling it to come up with a down payment. The portfolio grows and we have a larger mortgage interest deduction. What's your opinion of this type of mortgage?
Marty Margin

Dear Marty,
Brokerage firms with real estate lending operations have developed a mortgage where you can borrow up to 100 percent of your home's value by pledging part of your investment portfolio as collateral. I reviewed Merrill Lynch's loan for this column but plenty of other brokerages offer the same kind of option.

Merrill Lynch requires that pledged securities be held in a separate account with the firm. The amount of pledged securities required is 195 percent of any money lent in excess of 80 percent loan to value. For example, on a $100,000 home with 100 percent financing, the homeowner would pledge $39,000 in marketable securities. That $39,000 is 195 percent of the $20,000 lent in excess of the lender's 80 percent loan to value standard.

In other words, any money lent in lieu of a 20 percent down payment would require an asset pledge of approximately twice that amount. If the market value of the pledged assets falls the homeowner would be asked to pledge additional assets. Retirement investments cannot be pledged. Tax-exempt securities, such as municipal bonds, can be pledged but may reduce the tax deductions associated with the mortgage interest expense.

These loans can also be written as interest-only loans. With interest-only loans, the mortgage payment is sufficient to pay the interest expense but has no provision for the repayment of principal. It would be unusual for an interest-only loan to have a final maturity longer than 10 years. Unlike using a home equity loan along with a first mortgage, this type of loan has a single interest rate for the entire loan balance.

I don't like interest-only loans because I think most people use them to buy more house than they can afford. Homeowners can invest the difference in payments between a conventional mortgage and an interest-only mortgage, but the typical investment is in real estate, not in stocks or bonds.

The asset pledge makes sense if your investment portfolio's returns outpace your after-tax cost of debt. That's very likely over long periods of time, but there's no rule saying that the stock or bond market has to go higher. I would shy away from this type of mortgage loan if the dollar value of the pledged assets would represent more than 40 percent of your taxable investment portfolio.

For a primer on the less exotic types of mortgage loans read Mortgages: The basics on this site.

Related information: Dr. Don's biography Submit a question to Dr. Don Archive of Dr. Don columns

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-- Posted: Jan. 31, 2000