Life Insurance as an Investment

Variable Universal Life, insurance combined with investment, is a big seller

LAST May, Allmerica Investments Inc., an insurance-services firm, launched a unique new product: Allmerica Select Life is a policy that allows a person to invest in stocks, bonds, and money-market accounts, while also providing life insurance protection.

In the jargon of the insurance industry, the policy is what is called Variable Universal Life. VUL combines investing and insurance characteristics. It allows a person to plan for ''a lifetime of different financial needs,'' says Mark Steinberg, managing director of Allmerica Investments Inc. based in Worcester, Mass.

Variable Universal Life may sound like a mouthful. But it, and similar plans, are now bread and butter to scores of insurance agents. In 1985, fewer than 500 VUL policies were sold in the US, having a combined face value of less than $500,000. In 1994, insurance companies sold some 553,000 VUL policies, with a combined face value of more than $82 billion, says Donna Panning, an associate with the American Council of Life Insurance (ACLI), a Washington-based trade group.

VUL is the latest-wrinkle in a growing evolution of investment-oriented insurance packages. Insurance is divided into two basic categories. Term insurance is low-cost, no-frills insurance. It pays out a death benefit but provides no cash value built up over time. Cash-value insurance is usually called Whole Life. Premiums are fixed. The policy has a specific death benefit and builds a cash value that can be borrowed against. It has no investment options.

Life-insurance options

Variable life is a form of whole life. Premiums and death-benefits are fixed; the cash value is based on a person's investments, chosen from a menu of options.

Universal Life, the next step, allows you to change the death benefit/premium-provisions as circumstances change. Variable universal life allows policyholders to change the death benefit and premiums. It is cash-value driven, that is, investment-oriented, as opposed to premium-driven.

You kick in as much as you can invest, and in effect combine life insurance with mutual funds.

''When you are looking for tax advantages and developing a nest egg,'' there may be a strong case for a product with cash value, such as VUF, says Robert Hunter, director of insurance programs for the Consumer Federation of America (CFA), a Washington advocacy group. But Mr. Hunter, a former insurance commissioner for Texas, says buying such insurance should not be at the top of the ''financial pecking order.''

Individuals, he says, should first make certain they are ''participating to the full extent possible'' in their company-employee contribution plan, usually designated as a 401 (k) plan, or a 403 (b/c) plan. In these programs, companies will match worker payroll contributions, often on a dollar-by-dollar basis. Then, Hunter says, people should buy into an Individual Retirement Account (IRA), if they qualify. After that, he says, they might consider the advantages of a cash-value insurance program such as VUL. And some experts say they should buy disability insurance before buying into an investment-driven insurance plan.

The benefits

Investment-driven insurance plans do provide benefits. Take the example of Allmerica's Select Life plan: If you buy Select Life, you can invest your dollars in some nine different equity funds, plus a bond fund and a money-market account. There is no limit on contribution levels. Earnings are tax-deferred - that is, not taxed until the money is actually withdrawn. But premiums do not get a tax break. They must be paid with after-tax dollars, not pretax dollars as with an IRA or 401 (k) or 403 (b/c) plans.

While your contributions are earning interest, you also have a death benefit that can be changed as you choose. If you need to access the money, you can do so. You can make tax-free withdrawals, up to the amount of premiums paid in, Mr. Steinberg says. Beyond that level, you can borrow against the policy's cash value, also without a tax implication, he adds.

As with all insurance products, if you die before paying back the loan, the loan amount and any interest due will be deducted from the death benefit. In the case of a 401 (k) or 403 (b/c) plan, or an IRA, if you withdraw money prior to reaching age 59-1/2, you must pay taxes on money withdrawn, plus a 10 percent tax penalty. Moreover, you must begin taking out money by the time you reach age 70-1/2. But neither situation occurs with the VUL.

The catch

The ''catch'' is that whole life plans tend to be costly, with high commission and administrative charges. In some policies, the entire first year of premiums for whole life can be eaten up by charges, says James Hunt, an actuary with the CFA and former insurance commissioner for Vermont. Given high costs, Hunt recommends ''one should instead buy inexpensive term life, and then put the extra money'' that would have been invested in whole life into mutual funds.

To make a VUL policy cost effective, you must hold it ''until you die,'' and for a period of 35 to 40 years, says Glenn Daily, an insurance consultant in New York. The policies are ''most effective for estate planning,'' he says, where a person wants to leave large sums to heirs.

If you do plan to buy a VUL policy, or any other form of ''whole life,'' you can have the CFA undertake a financial review of your prospective policy.

Call the CFA at (202)-387-6121 and ask for the ''life-insurance rate of return service.'' It is $40 to examine one policy; $35 for each additional policy.

Another approach, says Hunter, would be to compare the costs of your possible policy with similar policies offered by USAA (800-531-8319), and Ameritas (800-255-9678). USAA in San Antonio, Texas, and Ameritas, in Lincoln, Neb., are ''low-load'' insurance companies. Industry experts consider their administrative and commission charges very low.