Care for a life policy with good returns, safety, tax breaks?

Some people want it all. They want a good return on their money, safety, and a tax break. Lately, the financial business has come up with a bunch of products to meet these demands. One of the latest comes from the life insurance industry, that once-stodgy purveyor of high-commission, low-return straight-whole-life policies.

This one is known either as single-premium whole life (SPWL) or single-premium insured deposit (SPID). Whatever the name, it should not be confused with the single-premium deferred annuity (SPDA). Though the SPDA is still being sold and is a good product for many uses, it got some bad publicity awhile back when a couple of companies, including Baldwin-United, got into financial difficulty.

In the last year or two, brokers have been pushing the SPWL or SPID heavily for customers who have fairly large amounts of money to invest. These could be wealthy people, or someone with a lump-sum retirement plan distribution, a large inheritance, or proceeds from the sale of property that are not going to be invested elsewhere.

But before dropping several thousand dollars into one of these policies, financial planners suggest you understand how they work and consider other options.

To start with, these are not for ``small'' investors. At a few companies, the minimum investment is $5,000, but many won't start with less than $30,000 or $50,000. In most of its examples, the industry uses $100,000.

For the sake of round numbers, let's say you do have $100,000. The taxes have been paid, so it's all yours. If you buy a SPWL or SPID, you'll have $100,000 earning tax-free compounded interest and whole-life coverage of $101,000 to $500,000, depending on your age. The older you are, the less coverage you get, but since many people who buy these things aren't looking for insurance, that's not really an issue.

What most people are really interested in is safety and a tax-free return on their investment, now running about 8 or 9 percent.

They might also be interested in a unique borrowing feature: After the first year, you can take out the interest on your deposit in the form of a low-interest (perhaps 6 percent) loan from the insurance company. These loans are tax free, so a $100,000 investment at 8 percent could spin off $8,000 a year without touching the principal. This can be particularly attractive to retirees who want to use the interest but also want to leave the principal behind for a spouse or other heirs.

If you don't touch the principal or interest for several years, you'll have more annual income later, or you can reach the same income level with a smaller starting deposit. If a $25,000 deposit were left untouched for about 15 years, for example, it would grow to $100,000 and generate $10,000 a year for the rest of your life.

An important variable in all this is the interest rate. Whatever rate is quoted this year may not be the same next year. Or a company may guarantee a rate for the first two years and change it every year after that. Before signing up, ask to see a history of rates paid on this and other interest-sensitive products and see how those rates compare with yields offered on other investments at the time, like one-year Treasury bills.

On the scale of risk, these products are probably quite low, especially if you choose an established insurance company with a long record of stability. There are at least 50 large insurance companies selling them, says Lynn Hopewell, a financial planner in Falls Church, Va., who calls these policies ``one of the last of the truly tax-favored investments.'' Some of the largest companies offering them include Keystone Provident (a subsidiary of the Travelers) Firemen's Fund (part of American Express), Equitable Life, New England Life, and Monarch Life.

Until the 1982 tax act, distributions coming out of annutites were considered part of principal and not taxed. Since then, these distributions are considered part of the interest and are taxable. But because the SPWL (or SPID) includes insurance coverage, it is considered a life insurance policy, not an annuity, and has kept the tax-free distribution feature -- for now, anyway.

``This non-taxability of borrowing on these things has been pushed so aggressively by brokers that Congress is now looking at this, too,'' says David Drucker, a financial planner in Bethesda, Md.

One reason brokers are so attracted to these products is the commission. In most cases, a broker gets 4 percent of the premium, or $4,000 on a $100,000 sale. An insurance agent may not even get that, but he or she can still sell it, so you might be able to find a policy with a lower commission.

You should also ask about surrender charges. Most of the policies have a sliding scale of early-withdrawal charges. In one example, if you take your money out in the first year, you lose 7 percent of your money; you'd lose 6 percent the second year and so on, until, after the seventh year, there's no penalty.

Before signing up for one of these new policies, check some of the alternatives.

``If you're not going to touch the money, an annuity might still be better,'' Mr. Drucker says. Sometimes, the total return on these is better, because the money is committed for a long time, he adds.

Also, he believes, you should be able to do better than an 8 or 9 percent return in a well-managed investment portfolio. There are many good investment managers who will work with someone who has $50,000 to $100,000 to invest. A fee-only financial planner might be a good place to start looking for one.

``I like a good no-load mutual fund,'' says Lori Dodson, a planner in Nashville. ``It might be a government securities fund or a growth stock fund. I would also look into buying an annuity. It does the same thing, but probably with a higher return over the long run.''

Thus, taking out a SPWL or SPID policy may be one way to get a respectable, safe, tax-free return, but people who ``want it all'' should compare it carefully with other choices.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given. References to investments are not an endorsement or recommendation by this newspaper.

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