
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, December 5, 1994                   TAG: 9412060040
SECTION: MONEY                    PAGE: A-9   EDITION: METRO 
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
DATELINE: NEW YORK                                LENGTH: Medium

VARIABLE UNIVERSAL LIFE POLICIES CAN PAY OFF BIG FOR RISK-TAKERS

If you're a long-term investor, you'll be interested in a fast-selling cash-value life insurance policy known as variable universal life (VUL). These policies could yield returns, but you must be prepared to shoulder unusual risks.

The word ``universal'' in VUL's name means ``flexible.'' You can vary the size of the premiums you pay and change the policy's death benefit.

But the ``variable'' is what really rings buyers' bells. With other types of insurance, your cash goes primarily into bonds. With VUL, you can choose among mutual funds, including funds invested in stocks. Long-term stock investments can raise both your death benefit and your cash value.

Note this: VULs aren't for families who need a lot of coverage, cheap. Their best buy is term insurance, which delivers death protection at a low out-of-pocket cost.

A VUL requires higher premiums, part of which creates an investment fund. It's for buyers who (1) can afford full protection for their families and put extra money aside; (2) will keep the policy for 15 years or more (preferably for life); and (3) would rather invest in life insurance than something else.

The big attraction is that life insurance lets you play tax tricks. Your savings accumulate tax-deferred. You can take money out of the policy and pay no tax until you've withdrawn all the cash you put in. You can borrow against your cash value, often at a low interest rate. When you retire, structured loans and withdrawals can yield a regular tax-free income. At death, the remains of your policy (minus the money that you used) can pass to your beneficiary tax free.

So what's not to like? On paper, nothing. But I'm always mindful of Murphy's Law (if anything can go wrong it will) and of Quinn's Corollary: Murphy was an optimist.

Some caveats:

If stocks do poorly, the policy may pay less at death - unless you purchase guaranteed coverage.

Most VULs carry higher expenses than other types of policies. On one typical contract, analyzed by James Hunt of the National Insurance Consumer Organization, a 9 percent return netted down to 2.5 percent after 10 years (largely due to the sales charges) and 6 percent after 20 years, including the value of the insurance over the years. Buyers should plan to put all their money into the policy's stock-owning funds rather than the bond funds, says life insurance consultant Peter Katt of West Bloomfield, Mich. Stocks have a better chance than bonds of yielding a decent return after costs.

Your results depend on how well the market performs year by year, which few investors realize. For example, say you expect your stocks to yield 9 percent annually, but late in the policy's life, the market does badly for three years. Your policy's costs will then be drawn from diminishing assets. You might have to add a slug of money to keep the coverage intact - even if your stocks yield 9 percent in the long run, says Paul Kelley of Columbine Insurance Consulting in Salt Lake City. So buy a VUL only if you can afford to make unexpected payments into the policy.

Based on the returns from stocks and bonds from 1973 to 1992, an all-stock VUL would have outperformed a regular policy assuming that the policy's returns matched those of bonds, Katt says. But what if those annual returns had run in reverse order? Then the regular policy would have won. Stocks raise your odds but they're no guarantee.

Many buyers are leaving their policies dangerously underfunded. For example, on a given policy you might be allowed to put in as much as $4,000 a year - but you might have only $2,000 to spend. If you pay just $2,000, however, and your stocks underperform, you'll have to add money (or reduce the death benefit) to keep your coverage from lapsing. Best bet, says Chris Kite of Fipsco in Des Plaines, Ill., which designs software for sale illustrations: Choose a policy that you can fund at close to the maximum.

If you borrow, you might accidentally take too large a loan. If the value of your investments drops, and the policy runs out of cash, it will lapse - causing all the loans in excess of the premiums you paid to be taxed as personal income. To avoid this disaster, Kite advises that you limit your loans to 70 percent of the cash value.

VUL can be a great product, but only for people who don't mind insurance that carries risk.

by CNB