Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

March 29, 2013
Should my wife and I convert some of our term life to whole life?

Q: Our financial advisor suggested that my wife and I convert some of our term life to whole life. Should we follow his advice? Here is our information:
Husband - 38 years old
Wife - 32 years old
Combined Adjusted Gross Income - $175,000

Husband - $10,000 annual 401(k) contribution ($5K Roth & $5K traditional)
Wife - $15,000 annual 401(k) contribution ($7.5K Roth & $7.5K traditional)

Husband - $2 million term life policy - 19 years remaining on a 20-year policy
Wife - $2 million term life policy - 19 years remaining on a 20-year policy

We both have a disability income policy. The total combined retirement account value 401(K) is $75,000. The total combined savings and investment account value is $300,000. We have a child (age 1). We do not have any debt. We're currently renting

Walnut Creek, CA

A: To answer your question, I consulted with a life insurance specialist.

Whole life is a form of permanent life insurance and should only be considered by people who need permanent life insurance coverage. This most often includes people with special needs relatives (that the individual is supporting) or people with large estates subject to taxes. Otherwise, a permanent life insurance policy is likely unnecessary.

Some insurance agents believe life insurance is an excellent investment; however, actual policy performance often proves this false. Life insurance policies carry administrative charges that are higher than most investment accounts. They also have annually increasing mortality charges that reduce the underlying performance of the cash value.

Many times the net internal rate of return (after all policy expenses) is less than 4 percent, but the policy owner believes it's closer to 8 percent or more. Further, whole life interest rates have been declining steadily since the late '80s and are just now hitting average rates of 5-6 percent.

Dividend trends provide insight to the future expected rates. These trends indicate rates will likely drop into the 3 percent range before increasing again, and this may take up to 30 years to realize. Therefore, nearly all whole life policies purchased now will see lower performance than illustrated, due to the declining dividend rates.

For those with a permanent need for life insurance, a guaranteed universal life policy may be a better option because its coverage is more efficient than whole life. It also has lower guaranteed premiums and is not subject to fluctuating dividend payments. Regardless of which permanent life insurance product is considered, you must first decide if you have need permanent life insurance.

Most of the time consumers are best suited for term life insurance. You and your wife are no exception. You are young and have one young child. Term coverage will provide life insurance while retirement and non-retirement accounts are built up. You have no debt and a net worth well below the current $10 million federal limit for a married couple. Therefore, you likely have no need for permanent life insurance.

It would be best to increase your 401(k) contributions (you are allowed up to $17,500 each) if you are seeking additional avenues for tax-deferred savings. You can consider a deferred annuity when all other avenues are maxed out, which will avoid the expensive mortality charges of a whole life policy. Few people are maxing out all tax-deferred avenues making deferred annuities necessary.

It is important to understand that term life insurance policies generate a commission for the agent only in the first year of the policy. Therefore, the agent has no financial incentive to keep the term policy after the first year.

The agent can generate a new upfront commission by converting the term to a permanent policy or replacing the existing policy. The agent will also receive ongoing renewal commissions if the policy is converted to a permanent contract. You have the option to convert the existing term coverage to permanent coverage anytime in the 20-year rate guarantee period, if your circumstances change. But it's best that you assess your needs before converting to the permanent policy.

You may want to review your term coverage as the policies only cover you to age 57 and your wife to age 51. You will likely need to purchase additional life insurance at an older age to cover ages 52 to retirement. This is not the case if all financial goals will be realized by ages 57 and 51, making life insurance unnecessary. Many consumers in your shoes implement 30-year term policies or a laddered policy structure to provide some coverage to normal retirement age.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.

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