Six questions to ask before you buy variable life.

• Author: Hermanson, Jonell
• Position: Personal Financial Planning

If you've been hearing a lot about variable-life insurance lately, you may be wondering what the hoopla is all about. Like whole life and universal life, variable-life insurance is a cash-value insurance product, so your premium dollars build up cash value inside the policy, in addition to your death benefit. With variable life, you can direct your premiums to various mutual funds within the product's separate account. All capital gains and losses from those funds pass through to the policy's cash values.

Variable-life insurance is an attractive investment option for some people because it allows them to assemble an investment mix that often includes a higher proportion of equities than the life insurance company's general account, which is the pool of assets backing whole-life and universal-life policies. As a result, variable life often yields better returns than these other types of policies. That's one reason the product has jumped in popularity during the last few years. According to Lipper Analytical Services, net sales of variable life, which were $3.3 billion in 1992, more than doubled to $6.7 billion in 1993.

If you like the idea of your insurance policy doubling as an investment, you need to know how to pick the right product. Asking the right questions can help narrow the field and help you avoid some of the pitfalls of buying variable life.

* What are the fund expenses? Unlike traditional life insurance, variable-life policies fully disclose the insurance company's and agent's sales loads, in addition to the costs associated with investment-fund management and operating expenses. The insurance company subtracts these fund expenses, combined with mortality and expense risk charges, before it credits investment earnings to your portfolio.

When you're analyzing the expenses of a potential policy, it's helpful to compare the fund expenses with those of other funds with the same investment objective. An index fund, for example, may have management fees ranging from 15 to 35 basis points, while for an international equities fund the range is from 65 to 90 points. Remember that lower investment-management fees and operating costs increase the earnings credited to your policy's separate account.

The funds typically available with variable policies are large-cap, small-cap, international, corporate-bond and balanced. Some products also include more specialized investment options, such as real-estate, natural-resources, high-yield-bond...