Life insurance options allow more investment leeway

The first time many of us hear the words ''financial planning'' is the day a life insurance agent comes to call. Often the agent's answer to the family's financial planning concerns is to buy life insurance.

Lately, however, people considering life insurance have been getting almost as much confusion as coverage.

First, there is the sometimes rancorous debate over whole life vs. term: Is it better to buy whole life and keep the same premiums throughout your life while building up some cash value, or should you buy term for much less and invest the money saved on premiums elsewhere?

Until the 1960s, the standard insurance policy for most people at the head of their households was whole life. Then inflation came along. Inflation not only eroded the value of the dollar, it helped produce much higher interest rates than were available from whole life's 3 to 6 percent.

As a result, millions of policies were converted from whole life to term. It was supposed to go the other way: A young person starting out with a new job and family would begin with term, then gradually convert to whole life as he got older and his income increased.

But many financial planners argue that people who have the discipline and financial acumen to find and consistently use good investment alternatives should buy term and invest the premium savings elsewhere.

''I don't think (whole life) is an efficient savings method,'' says Greg Confair, a Whitehall, Pa., planner who works with businesses to help them set up insurance programs for their executives. ''For the people we deal with, there are other uses they can put their money to.''

''For a person who is fairly active with their money, I would recommend buying term and investing the difference,'' argues John Eppich, a partner at Arthur Young & Co., the accounting firm.

Until now, most measurements of whole-life yield, compared with buying term and investing the difference, show whole life coming off rather poorly. Using a measurement method known as the Linton yield, Mr. Confair says, the best policy he has seen is one offered by Northwestern Mutual Life, and that comes out at 81 /2 percent, after taxes.

The insurance industry, however, points out that people who argue against whole life are ignoring the fact that their policies are more than investments; they are a form of financial protection for one's family.

''A lot of people are still buying the tried and true whole-life product,'' says Robert Waldron, spokesman for the American Council of Life Insurance. ''They understand that they're buying it for a benefit first, an investment second.''

Also, he says, insurance companies are improving their whole-life policies, increasing the yields, decreasing the premiums, or raising the coverage that the same premium pays for. The result, he says, is that while whole life may look bad in periods of high interest rates, it looks much better when rates or inflation are down. ''Over the long term, whole life flattens out economic cycles.''

While the insurance industry has been arguing against the ''buy term, invest the difference'' strategy, it has also been coming up with new policies that closely resemble this idea. The result is several new life insurance products that look more like investments.

The best known of these is universal life. The policies provide term insurance with a tax-deferred savings account. The account earns interest at fairly high rates, currently over 11 percent. If a customer wishes, he can change the amount of protection periodically, use the ''side fund'' from which to make premium payments if he wants to skip paying them out of pocket for a year, or he can make larger payments to the side fund.

The first universal life policy was introduced a few years ago by E. F. Hutton & Co. Since then, the product has gone through a gantletcq of tax court challenges, attacks from other insurance companies, and last year's congressional tax debate. The Tax Equity and Fiscal Responsibility Act, which that Congress passed, gave universal life the same tax break as whole life. Now, earnings that accumulate in the savings portion of a universal life policy build up tax-free.

Clearing up this matter helped raise the number of companies offering universal life from 70 to 130. One problem is that sales of univeral life and term have been growing at a much faster rate than those for whole life, and it is on whole life that agents traditionallly make their biggest commissions and companies make the most money. As a result, sales charges and fees on universal life policies at some companies are much higher than others. Some companies, for instance, charge annual fees equal to 3 to 10 percent of every year's premium for the life of the policy.

Still, many financial planners maintain that buying term is the best move in most cases. If you have an automatic way to build a side fund - such as a payroll deduction plan at work where part of your pay goes into an annuity, IRA, US Savings Bonds, or salary reduction plan before you see it - a side fund is being built up.

At the same time, insurance companies are getting more competitive with their term insurance. For example, ITT Life Insurance, a company that gained considerable attention last year when it announced it was dropping all forms of life insurance except term, sells $100,000 of annual renewable term to a 35 -year-old male for $150. For a nonsmoker, premiums in all categories are reduced 40 percent; and for a nonsmoker who is physically fit, there is a 50 percent saving.

Although you may have to spend a lot more money for term insurance in later years particularly after 50, you may not need as much insurance, either. In the meantime, most planners agree, the wide variety of investment alternatives available today makes it much easier to find a competitive investment for the money saved by not buying whole life.

Clearing up the confusion surrounding life insurance can be difficult. There are places to get help, however. One is the National Insurance Consumer Organization (344 Commerce Street, Alexandria, Va. 22314), a nonprofit public-interest group. It publishes a 44-page booklet, ''How to Save Money on Life Insurance.'' The price is $6.25.

Another booklet, this one free, ''Consumers Shopping Guide for Life Insurance ,'' is published by the New York State Insurance Department (Agency Building 1, Empire State Plaza, Albany, N.Y. 12257).