The Daily Dow
 Thursday, October 30, 1997
by Robert Sheard

LEXINGTON, KY (Oct. 30, 1997) -- Yesterday I wrote a Fribble comparing term life insurance to the traditional cash-value whole life policy, arguing that if you need life insurance (and not everyone does), you're better off buying the cheaper term insurance and taking the difference and investing it yourself.

One type of insurance I left out, however, is the popular variable life policy. Unlike the whole life policy, it splits the insurance and the investment components of the product into definable units, but the two products are nevertheless intertwined. And for the same reasons I argued against the whole life policy, I'll argue against variable life policies.

With a variable life insurance policy, when you die, your beneficiary gets both the value of the insurance component and the savings you've acquired. This wasn't always the case with the traditional whole life policies where the insurance company essentially kept your savings if your beneficiaries collected on the life insurance policy. The newer policies are a little more enlightened, but still no bargain.

First of all, the term insurance you get in the variable life policy is often not the greatest rate around. Today, it's very easy to shop around for basic renewable term insurance. It's a commodity, and increased competition has kept rates reasonably modest. For example, this morning after a five-minute search on the web I found a rate for a $500,000 term policy on a 30-year-old man for a fixed premium of $390 a year for the next 20 years. You can purchase an equivalent amount of insurance more cheaply outside of an annuity package deal than within it.

Secondly, the investment component of the variable life policy doesn't necessarily generate very competitive returns. You may choose from a list of mutual funds offered by that particular insurance company, but nothing outside that list. And since the company has to make its profit and cover its costs, it charges what can be at times a healthy fee for handling these accounts.

If you cancel the policy early on, say after only ten years, because you no longer need the insurance, the company has taken its relatively high fixed costs up front and your return for the ten years may be a miserable amount, perhaps as low as three percent.

Finally, you have to buy both the insurance and the investment funds from the same company since they're part of a package deal. This vastly limits your choices, of course.

One "advantage" the insurance companies will push is the fact that the annuities are tax-deferred savings. But so are regular IRAs and 401(k) plans, and the new Roth IRAs are tax-free. You'd be far better off buying term insurance on your own and investing the difference in your favorite retirement strategy. For that matter, given the fact that 82% of all funds can't even keep pace with the market, you'd be better off taking the difference and investing it in the Dow Dividend Approach in a taxable account than putting it into a variable life annuity with its limited choice of mutual funds and its high service charges.

The other "advantage" of this kind of package is the compulsory savings it includes. Most people, so the theory goes, won't get around to "investing the difference" unless it's done for them. Well, face it, if that's the best thing the package has got going for it, it's precious little. If you have the discipline to make your regular premium payments on the policy, your regular mortgage payments, whatever, you've got the discipline to send the monthly or quarterly check to your savings portfolio.

The bottom line on life insurance is simple: buy term as long as you need it and invest the difference. You'll be "self-insured" through your savings much more quickly and you'll save a bundle on your life insurance policy in the interim. When it's no longer necessary, just cancel it. No muss, no fuss.

If you would like a wonderful examination of this topic in a little more detail, check out David Chilton's The Wealthy Barber. It's still the best basic financial planning guide I've read. Just insert the phrase "Foolish Stocks" every time Chilton says "Mutual Funds" and it's perfect. Fool on!

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool. ________________________________

TODAY'S NUMBERS
Stock  Change   Last
--------------------
T    -   3/8   48.19
GM   -2  1/16  66.00
CHV  -   7/16  80.50
MMM  -1  1/4   92.19

           Day   Month    Year
                  Day   Month   Year
        FOOL-4   -1.27%   2.34%  18.88%
        DJIA     -1.67%  -7.09%  14.48%
        S&P 500  -1.68%  -4.60%  22.00%
        NASDAQ   -2.03%  -6.84%  21.64%

    Rec'd   #  Security     In At       Now    Change
   1/2/97  153 Chevron       65.00     80.50    23.85%
   1/2/97  179 Gen. Motor    55.75     66.00    18.39%
   1/2/97  479 AT&T          41.75     48.19    15.42%
   1/2/97  120 3M            83.00     92.19    11.07%


    Rec'd   #  Security     In At     Value    Change
   1/2/97  479 AT&T       19998.25  23081.81  $3083.56
   1/2/97  153 Chevron     9945.00  12316.50  $2371.50
   1/2/97  179 Gen. Motor  9979.25  11814.00  $1834.75
   1/2/97  120 3M          9960.00  11062.50  $1102.50


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