Checking out new life-insurance hybrid

During the past decade or so, each time an insurance company has introduced a new financial product it has done so amid much hoopla. This one, each company seems to say, will deliver the most insurance coverage at the lowest cost, while giving the best yield (for those dollars not being used to pay death benefits).

While there appears to be a wide array of insurance products, all the hoopla has left the marketplace with just four basics: term, whole life, universal life, and variable life. Rates, coverages, and investment performance may vary widely, but these are the four basic products.

Until now. The fifth entry is officially known as ``flexible-premium variable life,'' but it is already picking up a number of nicknames, including universal life II and universal variable. By combining qualities of flexible life and universal life -- two products that account for up to 50 percent of new life insurance sales -- flexible-premium variable promises to grab a big share of the market for new insurance products.

Before rushing out to find an agent who sells it, though, you might want to examine this new insurance creature carefully.

With variable life, the premium remains constant, while the cash value of the policy can go up or down, depending on the performance of various investments (usually mutual funds) the customer selects.

With universal life, the policyholder can, after a certain amount of cash has built up in the policy, vary from year to year the proportions of the premium that go into investments and insurance coverage. Or the policyholder can use money in the investment portion to pay premiums, thus skipping premium payments for a time.

Flexible-premium variable combines some aspects of both. It offers the selection of investment programs that can alter the performance of the policy's cash value, along with the ability to change the premium payments and death benefit as the customer sees fit.

Unlike universal life, however, both variable life and this new product must be registered with the Securities and Exchange Commission (SEC) before they can be sold, since they offer mutual funds that invest in stocks and bonds. So far, only the Prudential Life Insurance Company and the Acacia Group in Washington, D.C., have crossed that hurdle.

One possible drawback to flexible-premium variable could be its high cost. When the insurance industry first applied for approval, it asked the SEC to exempt it from the 9 percent cap on the sales charge, or ``load,'' that a mutual fund may charge customers for buying shares. The SEC has yet to rule on this request, but since most full-load funds charge an 81/2 percent front-end fee, purchasers of this new product can be fairly certain their early premiums will be reduced to at least that percentage.

``It will be possible for the insurance companies to impose rather large charges without the consumer knowing about it,'' says Joseph M. Belth, professor of insurance at Indiana University and editor of The Insurance Forum, a newsletter. An explanation of how the charges are imposed will be contained in a prospectus that must be given to all customers, he notes, but that document is ``50 to 100 pages of finely packed print. It's extremely complex. The very explanation of how the charges are going to be leveled is very difficult to understand.''

Another possible drawback is experience. In the beginning, many of these products will be investing in mutual funds set up specifically for them. As a result, they will not have the track record most investors look for in selecting a fund.

At the Acacia Group, this problem should be minimized somewhat, says Charles L. Larance, a spokesman. Though the funds will be new, some of them will be managed by the same people who manage the Calvert Funds, a long-established group of mutual funds owned by Acacia. The Acacia product, known as Flexible Account Life II, will be available April 1, Mr. Larance said.

The Prudential product, Variable Appreciable Life, has only slightly more experience, having been first offered on a nationwide basis on Feb. 22, says James O'Connor, a vice-president at the firm. The fund behind Prudential's policies is the same one that has been used for its variable life product since June of 1983, he said.

No matter how much experience the underlying funds have, people might want to consider another step before looking at products of this type: ``No one should buy any cash-value life insurance policy [which includes everything but term] who doesn't have an IRA,'' says James Hunt, an insurance actuary and former Vermont insurance commissioner. The earnings in an IRA and these insurance products both grow tax free, but the IRA also has an automatic tax deduction that insurance policies can't offer.

``But assuming one has put the maximum allowed in his IRA, there are some attractive tax aspects to investing in life insurance,'' though perhaps not in flexible-premium variable life, Mr. Hunt says.

He is also concerned, for example, about the high expenses of the new product. ``I have checked out Prudential's and it has a very high sales charge,'' Hunt said. When insurance agents are selling cash-value life insurance policies, they cannot tell customers what the policies are likely to earn, he notes. Instead, they can show how the investment portion of the policy might grow based on three different interest rate assumptions: zero percent return, 6 percent, and 12 percent.

Using the most favorable 12 percent assumption, Hunt says he found that flexible-premium variable would provide an actual return of 81/2 percent after investment expenses, compared with 11 percent after expenses for the average universal life product.

Why the difference? For one thing, universal life does not invest in securities selected by the policyholder, so it does not need SEC registration and the paper work that goes with it. For another, Hunt says, the system needed to switch money from one fund to another and maintain the flexible-premium feature is costly.

He suggests that anyone considering this new product ask the agent to find out what the 6 or 12 percent yields would be after all expenses were taken away.

Several other companies have filed applications with the SEC and, pending registration, they should be selling by this summer, an SEC spokesman said. Waiting until then, when there are more products to compare, and perhaps competition has lowered the expenses on some of them, would probably be worthwhile.

In the meantime, Professor Belth contends: ``I don't think these policies should be automatically rejected or accepted by everybody. What people call advantages or disadvantages I call characteristics, and as long as people are educated about these characteristics, they should be able to come to a good decision.''