by Archie M. Richards, Jr.
July 31, 2006

Al writes, "I am 66 years old and have had a $50,000 universal life (flexible premium) policy for 19 years. I've paid premiums of $600 a year, totaling $11,400. The company says that unless I increase the premiums sharply, the policy will expire in only 3 years. The current premiums and relatively low interest rates won't be enough to sustain it.

"My wife, 64, also has a $50,000 universal life policy. She pays $360 a year. Her guaranteed death benefit will run out in 11 years.

"The agent wants us to buy a new universal life policy with a $250,000 death benefit, payable at the death of the second to die. The new premium would be $2659, an increase of $1700. He says we can make '1035 exchanges,' transferring the cash values of the old policies tax free to the new one.

"We've spent a lot of money on our policies and will lose it all if the premiums aren't increased soon. I've read your column about variable universal life and need advice about it. We'd like to leave money to our daughter, who has multiple sclerosis."

The insurance agent gave you a bum deal, Al. Don't let him do it again.

With universal life policies, the money is invested in short-term debt. Short-term interest rates were very high when you bought the policies 19 years ago. They have since fallen sharply. Yes, they've risen lately. But after inflation is licked (oh, it will be), short-term rates will resume falling.

Variable universal life is my favorite kind of permanent life insurance. "Variable" means that the money is invested within the policy in stock and bond mutual funds.

A tax-free 1035 exchange is a good idea, but not with an insurance company that uses salesmen.

Instead, call Ameritas Direct, a division of Ameritas Life Insurance Corp. It offers a variable universal life policy with no sales costs. You have to take the initiative to contact the company (www.ameritasdirect.com, 800-552-3553). No salesman will call or come to visit.

With a 1035 exchange, the high costs of your old policies will be carried forward to the new Ameritas policy. But since your initial cash value will be low, many years will pass before the earnings in the new policy exceed your costs and become taxable, in the unlikely event you withdraw the cash value before death.

If you die with the policy still in effect, the earnings would never be taxed.

All the best to your daughter. I hope medical science conquers multiple sclerosis before too long.

Rose writes, "I'm 80 years old, living on a low fixed income. If I obtain a reverse mortgage, can it make me go bankrupt?

No, Rose; it can't.

Let's say the reverse mortgage provides that, until you move or die, you receive a monthly income of $2000. You surprise everyone and live to the ripe old age of 110. During the 30 years, you'd receive $720,000.

You then move to a nursing home. The income stops, and the bank sells the house.

If the sale brings in, say, $220,000, the bank is short by half a million. Can it knock on the nursing home door and ask you for the money?

Absolutely not. The bank has no recourse to you or your other assets. The mortgage is secured only by the house. If the proceeds of the sale are insufficient to repay the loan, the bank and the insurance company eat the loss.

Now assume that the numbers run the other way. The proceeds of the sale of the home exceed the loan's accumulated balance. Great, you receive a check for the excess.

With a reverse mortgage, you can only win; you can't lose.

War Department: Muslim extremists will lose. Defeating them will take a while, and they'll kill some good guys in the meantime. But they cannot win.