Pros and cons of universal life insurance

(Do you have a question about your financial affairs? Financial planning consultant, Robert S. Pennartz, CFPģ takes calls at 1-302-654-5556, extension 138 or 1-800-366-0632, extension 138. A selection of these questions and Pennartzís responses are published in this column. Anonymity is assured.)

Q. I bought a universal life insurance policy 25 years ago. After paying for it over all of these years, Iím told that I have to double my premiums to keep it going or it will run out (lapse). I want to keep this insurance, but not at twice the price. Can you tell me whatís going on here?

A. It seems like you have a problem that a lot of people have. Universal life insurance is a type of policy that pays current interest and charges current costs for the insurance protection. The interest rate can change year-by-year and the cost of insurance can change year-by-year. 25 years ago, interest rates were much higher than they are today. If you (or more likely, your insurance agent) calculated a small premium originally, figuring that the policy would earn substantial interest, then you probably paid too little of a premium for it to last. Also, over those 25 years, you gradually got older, so your risk costs for the insurance protection have increased. These two factors, too little premium and too much cost, have led to your current problem. You can consider some changes to rescue this policy. You should consult with your insurance agent or your financial planner on this, but hereís some ideas to talk about:

1. If your financial situation would warrant this, you can look at reducing the insurance amount.

2. Review the class and rating on the policy (e.g. if it was issued as a smoker and you no longer smoke, you may be able to get this reissued without the extra cost of a smoker).

3. You can also look into changing this to a different type of policy that has guaranteed costs and benefits (but you may have to be insurable and pass a physical and this may be subject to additional charges and fees).

In any case, a good review with your insurance agent or your financial planner would give you specific information that you can act on.

Q. Iím turning age 66 this year, and can start to take my social security retirement benefit, but Iím still working and donít really need that extra money now. Should I take that benefit anyway, and invest the money, or should I delay taking social security until later?

A. At age 66, according to the Social Security Administration, you attain full retirement age and can start to receive your unreduced primary insurance amount (retirement benefit). For each year that you delay the start of benefits, your benefit will increase by 8 percent per year up to age 70, after which no further credits will be earned.

Without investing your social security benefits, your break-even age would be around age 83 (in other words, thatís the age at which your total cumulative benefits starting at age 66 would equal your total cumulative benefits starting age 70). If you live to be older than 83, then delaying your benefits would bring you more money.

If you invest your social security, it depends on your rate of return and your risk tolerance to calculate what your break-even age would be. If you get positive results from your investment, then the break-even age would be more than 83.

Itís really not a fair comparison, though, because you are comparing an investment strategy with a government guaranteed benefit.

I would recommend that you contact your financial planner and figure out a strategy that works for you.

Robert S. Pennartz, CFPģ is a Financial Planner at the Financial House, a Registered Investment Advisor, in Centreville, DE. Bob lives in Pocopson Township with his wife and children. He is a registered representative offering securities through Lincoln Financial Securities Corporation, Member SIPC, branch office: 5818 Kennett Pike, Wilmington, DE 19807. Lincoln Financial Securities Corporation and The Financial House are not affiliated. Lincoln Financial Securities Corporation and its representatives do not offer tax or legal advice. You should consult your individual tax or legal professional regarding your individual circumstances.