Getting down to basics. (Life Insurance).

Life insurance is not about earning commissions off an investment product. As a financial adviser, chances are your clients will investigate or purchase life insurance--and they will consult you. According to some estimates, average Americans purchase life insurance approximately seven times during their lifetime.

Whether your firm actively places the insurance; reviews your client's insurance portfolio and refers the insurance element to an insurance professional; or outsources the entire responsibility--a little knowledge can go a long way as you assist your clients with their life insurance needs.

THE FUNDAMENTALS

Essentially, there are three types of life insurance: permanent (whole life--ownership), term life and annuities. A subset of the whole-life market is universal life. Everything else is marketing. As with any financial product, the key is to recognize what your clients are buying and why.

Whole Life Insurance--A traditional whole life policy provides both a death benefit and a cash value component. The policy remains in force for a lifetime, premiums stay level and the death benefit is guaranteed. Over time, the policy's cash value grows, helping to keep premiums steady. Whole life premiums start out significantly higher than those of comparable term life policies, but over time the term policy's ever-increasing premium overtakes the whole life policy's level premium.

Term Life Insurance--Term insurance is life insurance coverage that pays a death benefit only if the insured dies within a specified time period. Term policies do not have a cash value component and must be renewed periodically.

Annuity--An annuity is a contract between an insurance company and an individual that generally guarantees lifetime income to the individual whose life the contract is based upon in return for either a lump sum or periodic payment to the insurance company. Interest earned inside an annuity is tax deferred until it is paid out or withdrawn.

Universal Life Insurance--An adjustable universal life insurance policy provides both a death benefit and an investment component called a cash value, which earns interest at rates dictated by the insurer. The policyholder may accumulate significant cash value over the years and, in some circumstances, "borrow" the appreciated funds without paying taxes on the borrowed gains (taxes may be required if the policy is surrendered). As long as the policy stays in force, the borrowed funds do not need to be repaid, but interest may be charged to the cash value account. Policy owners can adjust their premium payments.

ASSESSING RISK

If you help clients assess the risk associated with purchasing different policies, you need to look at three key centers of expenditure that can affect premium prices or the policy's cash value: mortality charges, company expenses and sales load. When considering publicly traded insurance companies, you also should review their shareholder dividend distribution history.

MORTALITY COST

Mortality cost is a charge the insurance company builds into policies to cover the risk of the insured dying, which is projected actuarially, and the policy being collected upon. The charges can be impacted by how restrictive a firm is with its health underwriting standards. In general, the younger the insured population, the lower the mortality rate, and the lower the insurance cost. In older populations, the death risk is greater, as is the risk charge. Some policies offer maximum mortality charges, and others have adjustment clauses. The policy mortality charges can change dependent on the actual mortality experience of the insured group.

COMPANY EXPENSES

Company expenses are another integral component of risk. The amount of a premium that goes toward covering company expenses is generally indicative of the insurance company's efficiency. The percentage of expenses to premiums for whole life insurance usually varies between 10 percent to 40 percent. Generally, the greater the percentage, the greater potential for less of your premium to go toward cash value or to be retained by the insurer as surplus. It's important to review the specific policy to determine actual costs filtering through to the premium amount.

SALES LOAD

Risk is also affected by the amount of sales load a carrier pays as allowance to its agents to cover marketing and related costs. Some companies pay a sales load well over 100 percent of the first-year premium, while others pay none at all. Sales load by itself is not the determinant of lower expenses filtering through a policy, but it is a consideration. Often, the present value of the stream of fees charged for securities management over a 20-year period for a cash accumulation similar to life insurance can be substantially greater than that received from the life insurance transaction.

DIVIDEND PAYMENTS

In discussing risk, you also should look at how various public companies handle profits. In stock companies, a portion of profits may get paid to shareholders as dividends. In mutual companies, a portion of profits (divisible surplus) gets returned to the policyholder as dividends, but the amount paid varies from company to company. If a mutual company adheres to its intent, this may enhance a policy's cash value.

RESOURCES

Check out the following life insurance resources:

A.M. Best, www.ambest.com, publishes an annual compendium of insurance companies that ranks firms by size and assigns a rating. It gives a snapshot of product lines and provides operational and financial analyses as well as current trends.

Vital Signs, www.usinfo.com, compiles easy-to-evaluate data that is available on the website or as a software subscription. You simply plug in the company you want to research, and you'll receive substantial data for comparative purposes.

Blease Research, www.full-disclosure.com, offers Full Disclosure software, which analyzes various insurance products and outlines more than 40 product specifications on each policy.

Morningstar, www.morningstar.com, and CDA Weisenberger, www.wiesenberger.com, are websites that many CPAs use for financial analysis. For a few extra dollars, you can assess the performance of variable life subaccounts. In addition to a review of the financial performance of the underlying separate accounts, the sites provide information regarding mortality and expense ratios, other insurance expenses, and subaccount asset management fees.

Dynamic Insurance Solutions, www.financialprofiles.com, was developed by Rick Weber of Carlsbad, Calif. This tool uses Monte Carlo simulations and evaluates the probability that a variable life insurance policy will mature according to expectations or disappear before the client's eyes.

Kettley Backroom Technician, www.kettley.com, offers resources for client communications regarding insurance, estate or investment planning.

The California Department of Insurance, www. insurance.ca.gov, lists professional insurance advisers licensed to transact business in California. Here you can check an agent's recent education, licenses held and the insurance firms with which the agent is licensed.

Leonard C. Wright, CPA/PFS, CFP, CLU, ChFC, is a principal of Strategic Financial Group, a Los Angeles-based financial planning firm. Wright is a member of CalCPA's Personal Financial Planning Committee, and he can be reached at [phone] or www. wrightplanner.com.