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Publication: Investor's Notebook
MAKING GOOD USE OF A LIFE POLICY

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       Investor's Insight - September 18, 2006           
          "A Digest of Investment Opinion From the 
             World's Leading Financial Advisers"

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MAKING GOOD USE OF AN EXPENSIVE UNIVERSAL LIFE POLICY
by Scott Burns

Q: We bought a universal life policy about 18 years ago 
in the amount of $155,000. Now the policy is being eaten 
up by charges as I get older. The cash value is now 
about the same as when we began, about $39,000. The cash 
value will be wiped out in about six years unless in-
terest rates rise from the 4 percent the policy is now 
paying.

My impression is that the company will not raise the 
rate during this year and will be slow to increase it. 
I bought the policy to provide a sum that would offset, 
for my wife, the loss of my pension at my death.

We are toying with the idea of salvaging the cash value 
now. It might not be an adequate amount for the intended 
purpose, but it might be better than losing everything. 
I am 78, and my wife is 71. Our $40,000 income is from 
two pensions, investments and Social Security.

My Social Security, which she would receive if I die 
first, is $16,074. Our net worth is about $388,000, 
excluding the cash value in the policy, and about 
$90,000 in home equity. How would you solve our 
quandary? -- C.S., Houston

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A: At age 78, life insurance costs get pretty hefty. 
According to www.insure.com, a healthy 78-year-old 
male could expect to pay over $400 a month for 10-
year term and $1,000 a month for a lifetime term 
policy. So it will take a lot more than raising the 
interest rate from 4 percent to prevent your policy 
from exhausting its cash value pretty rapidly. 

One option you should consider is converting the 
existing policy to a paid-up life policy. The death 
benefit will be substantially lower than $155,000, 
but your wife will still have some life insurance 
death benefit to offset the loss of your pension 
income.

Before doing that, however, you should figure out 
how much life insurance, if any, you really need. 

Follow me on the math. If you and your wife currently 
live on $40,000 and $16,000 of it comes from your 
Social Security, the income you need to generate from 
your investments or insurance proceeds is $24,000. 

Add the cash value of the life policy to your 
$388,000 nest egg and you have $427,000. That means 
you'll need a reliable 5.6 percent annual return 
from your nest egg to replace your current pension 
and savings income.

Is that easy to do?

No. 

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But if your wife converts $200,000 of your nest egg 
to a life annuity upon your death, she will have an 
annuity income of at least $16,800 for life from the 
annuity. She will need to get only $7,200 of income 
from the remaining $227,000, a cash return of only 
3.2 percent. Since the amount of life annuity income 
she can get from $200,000 will rise each year, the 
project will become easier, not harder, as you both 
continue to age. (The life annuity figures, by the 
way, come from www.immediateannuities.com.) 

Your wife also has two other safety factors. First, 
her cost of living as a widow won't be as high as 
your cost of living as a couple. To be sure, the 
costs won't be cut in half, but there will be a re-
duction. Second, with $90,000 of home equity, she 
may want to move to a continuing care community, 
eliminating the chores of homeownership.

It's just possible that your 18-year-old life policy 
has outlived your need for it.

Q: My husband and I are both 58. Most of our money is in 
our 401(k) accounts. I have read your columns about I 
Savings Bonds and think they are very attractive for a 
long-term investment. We were thinking of putting money 
in I Bonds every year, starting at age 59 1/2, for 10 
years and starting to withdraw money starting at age 70 
to 80. However, we also think about transferring the 
money to a 401(k) or Roth IRA. Is there any limit to the 
transfer? -- H.L., San Jose, Calif.

A: There is an annual purchasing limit on I Savings Bonds 
of $30,000 per person. But it doesn't make sense to put I
Savings Bonds in qualified accounts because the interest 
they earn is already tax-deferred. So buy some amount of 
bonds each year and forget about the qualified accounts.

You can discuss this issue or any other topic in the new 
Investor's Insight forum. Check it out here...

 
Investor's Insight Forum

(Investor's Insight reflects the opinions of experts. It does 
not recommend any specific investments, and no endorsement is 
implied or should be inferred. For more information, contact 
the individual firms cited).

COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE

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