A Gamble On Life

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 program 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 have surplus income. You might also arrange to guarantee your death benefit, even if your investments do poorly.

A second example. Based on the returns from stocks and bonds from 1973 to 1992, an all-stock VUL would have outperformed regular universal life (assuming its 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.

Life insurance wasn't intended to be a tax dodge for the rich. Someday Congress may shut the loophole that gives you a tax-free retirement income -- and don't count on being grandfathered, warns Glenn Daily, a New York life-insurance consultant.

Many buyers are leaving their policies dangerously underfunded. For example, you might be allowed a premium as high as $4,000 a year but 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 allowed. Deliberately paying high premiums goes against the grain, but it leverages your investment and raises the odds that your coverage will stay in force. Opt for a rising death benefit, to get higher payouts in the future.