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 interest 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., by e-mail from Houston

  

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.

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 only need to get $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 reduction. 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  ½ for ten 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., by email from San Jose, CA

  

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.

If you are eligible for a Roth IRA conversion, you have another option. Take money from your 401(k) plan, pay taxes, and invest the money in Treasury Inflation Protected Securities (TIPS) in the Roth. As with all income from Roth IRA accounts, no taxes will be due on any withdrawals. TIPS of relatively long maturities have higher real returns (about 2 percentage points over inflation) than I Savings Bonds (1 percentage point over inflation), but they are subject to market valuations and purchases are less flexible than I Savings Bonds.

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Personal finance writer Scott Burns is syndicated by Universal Press. His twice weekly column appears in newspapers from Boston to Seattle. He is the Chief Investment Strategist for AssetBuilder, Inc. Readers can register at www.scottburns.com. Questions/comments can be posted directly. They can also be sent, without registration, to scott@scottburns.com. Questions of general interest will be answered in future columns and on this blog.

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