Insuring your wealth: the right insurance policy can help you build and protect your assets.

DENELLE WAYNICK, A CORPORATE attorney for Schering Plough Corp. in Kenilworth, New Jersey, used to think life insurance was simply a means to cover burial expenses. That all changed when her son, now 13, was born. Waynick began to see life insurance, combined with other investments and savings, as a way to provide financially for her son in the event of her death. In 2001 she bought a $750,000 variable universal life insurance policy, which doubles as an investment vehicle.

"The concept was relatively new to me," says Waynick, 39. "I was fixed on the traditional notion of life insurance to [pay for] my burial."

Life insurance products, which like regular life insurance provide tax-free money for beneficiaries upon a policyholder's death, are increasingly included in investors' financial portfolios. They also provide other options for leaving money to beneficiaries. According to Dwight Raiford, a financial planner with MetLife Financial Services in New York, an insurance policy should be the bedrock of most financial or investment plans. Investors should also include a 401(k), IRA, and Social Security and pension plans in their portfolios.

"It's almost like a chess game. Move pieces around and, at the end, create more wealth," says David Roy Eaton, chairman and chief executive officer of the Eaton Group, a financial services firm with offices in New York and Boca Raton, Florida. "It's not about putting every dollar in [life insurance]--it's about a balance."

Certain life insurance policies can help build wealth by serving as tax-deferred vehicles in which investment returns grow, building up cash value. Policyholders can borrow against the cash value for retirement income or to pay college tuition or mortgages, leaving other savings and investments intact. And the cash value doesn't score against a child who's applying for financial aid for college, as it would with other investments, says James Hunt IV, wealth management adviser for Northwestern Mutual Financial Network in Summit, New Jersey.

Although insurers offer several options, financial experts recommend two products: variable universal life insurance, which combines life insurance with a policyholder-driven investment component; and traditional whole life insurance, which offers guaranteed returns and fixed premium payments. Before choosing a policy, weigh the risks against the potential wealth that can be accumulated for retirement, Hunt advises.

VARIABLE LIFE INSURANCE

Variable life insurance is suitable for younger, risk-tolerant investors because it includes a more volatile mix of mutual funds, bonds, and stock investments and does not offer a guaranteed return. It is also less expensive and offers flexibility with premium payments. The policies are popular among 30- to 45-year-olds. Policyholders, not the insurer, decide where to direct investments within a tax-protected life insurance policy. Some term life insurance policies can be converted to variable life insurance.

"The client is taking some involved risk, but over time, there is potential for greater wealth building," says Raiford, "especially for younger people who have more time before retirement. The equity component over the long run has consistently outperformed inflation." Because of the risk involved and the time needed to mitigate that risk, Raiford does not recommend a variable universal policy for those aged 60 and older.

The tax advantages and the opportunity to build wealth made the variable universal product attractive to Ron Tigner, president of Georgia Certified Development Corp. in Atlanta. But it took some persuading by a financial adviser to get the former whole life policyholder on board.

"The potential for rapid appreciation affords me the protection I want," says Tigner, 54. "The objective is to defer taxes as long as possible. It's a way to invest with no immediate tax consequences."

Tigner's company provided him with a variable universal life policy for $150,000 about seven years ago, and then another for $750,000 about two years ago, replacing the whole life policy he had purchased previously. He also has a 401(k) plan, a Roth IRA, and a 475 plan. The average return from his variable life policy is 8.45%, after the cost of insurance. (Cost is determined by the age and health of the policyholder.)

"The return is the same as you can get in the market," says Jan Williams, financial adviser for AXA Advisors in Atlanta, "minus the cost of insurance and administrative fees. As with a 401(k) plan, [the return] depends on the options you select."

Even with the risk, the variable universal product is recommended for most clients instead of whole life as a wealth-building tool, Williams says. He advises meeting with a financial adviser at least twice yearly to monitor and maintain the investment component of the policy.

WHOLE LIFE INSURANCE

Whole life insurance also has its benefits. It's less risky than variable life, buyers receive a guaranteed or fixed amount of money, and premium payments do not change over the life of the policy. Whole life insurance policies are often popular among consumers close to retirement age. The downside: it costs more. But as with other life insurance products, the premium payments often can be suspended when the cash value increases enough to cover those payments. "You're paying more in terms of premiums today," Eaton says, "but you have reassurance."

With whole life, policyholders don't direct where the money goes; the insurer chooses the stock investments. Hunt says his firm invests 85% of the premiums into fixed-income options and 15% into real estate, stocks, and other areas. The rate of return among whole life policies could be 4.5% or higher over 25 years, says Eaton, who is also a financial representative of Guardian Life Insurance Co. in New York. Hunt notes that whole life isn't for everyone; he sees it as more of an enforced savings plan than an investment vehicle.

Consumers shouldn't buy life insurance if they can't commit to paying the premiums for 15 years or more, adds Eaton. If you don't keep up the payments, the policy could he canceled, and you could lose what you've paid out. If you cancel the policy within the first 10 years, you could incur heavy surrender charges, Raiford adds.

Insurers are creating more options, or riders, to make whole life more flexible. Biders such as accelerated death benefits allow terminally or chronically ill policyholders to get cash value out faster.

"There is a lot more you can do because you have the policy in place," Eaton says. Whole life is generally more expensive, so young professionals who can't afford the premium can purchase smaller amounts of life insurance. At Guardian, with guaranteed purchase options, policyholders can purchase additional insurance every three years between the ages of 25 and 46, or when they marry or have children, without taking additional medical tests, Eaton explains. Or they can choose lower initial payments that gradually increase.

SHARED BENEFITS

Both variable universal and whole life options offer tax-deferred features. As long as the policy is in force, notes Williams, you can borrow against either type of policy and not pay back the loan unless you want to avoid the reduction in death benefits. Although you will be charged interest, the loans are not taxable, unlike funds withdrawn from other investment vehicles, such as 401 (k) plans. Both options can also leave income-tax-free money to beneficiaries as an "intergenerational wealth transfer," Raiford says.

Both also offer asset protection from creditors. In the U. S., 44 states have laws protecting the policies from creditors' claims, such as lawsuits, that can wipe out bank accounts, mutual funds, and brokerage accounts. Doctors and other professionals who are more likely to face lawsuits generally appreciate this protection.

Both types of policies also provide an accessible financial layer as an alternative to liquidating other, taxable, assets.

The tax implications are considerable. Williams notes that if you put away $10,000 a year for 20 years in a mutual fund at a 7.5% rate of return, you would have $433,000; the same amount in a life insurance product would yield $348,000. But funds borrowed from the life insurance will not be taxed, allowing you to keep more of your money.

"You've lost nothing, recovered the initial investment, had a substantial amount of growth, and didn't have to pay taxes," he says. "If properly designed, the right insurance can be a powerful wealth-building tool."

* Snapshot No. 1: Overfunding

For example, if a 30-year-old woman bought a $1 million policy with an expected return of 7.5% and a required annual premium of $5,750, but she overfunds the policy by paying $8,500 until age 55, she could borrow $65,000 a year against the policy from age 65 to 85, says Williams. If she dies at age 85, there would still be $505,000 left for her beneficiaries; at age 90, the amount would be $654,000.

There is a caveat, however. The amount of money that can be borrowed from the policy could change substantially if investments don't perform as expected, says Williams. Both Tigner and Waynick overfund their policies.

* Snapshot No. 2: Variable Life

Raiford priced a $1 million variable life insurance policy for a healthy 40-year-old man in New York. Death benefits for such policies depend on age stipulations decided on beforehand by the consumer and the insurer. Using age 65 in this example, the policy would cost $12,400 a year and would guarantee death benefits of $1 million only if the man died before age 65. If the policy's investments performed poorly or he died after age 65, the death benefit could be less than $1 million.

* Snapshot No. 3: Whole Life

Raiford priced a $1 million whole life policy for a healthy 40-year-old man in New York. A whole life policy would cost about $14,000 a year. However, the death benefit would be $1 million (minus any loans taken against the policy) whenever the man dies.

Know Your Options

The pros and cons of various life insurances types

* Whole Life Insurance

This is the oldest kind of cash value life insurance, meaning it combines a death benefit with a savings component. It provides coverage over an individual's whole life, as opposed to a specified time. Premiums--the price of an insurance policy, typically charged annually or semiannually--are fixed, so they remain level throughout the policy's lifetime. The insurance company makes all investment decisions.

* Most basic form of cash value life insurance

* Less risky

* Fixed death benefit

* Costly

* Requires less participation

* Popular among those closer to retirement age

* Variable Life Insurance

This type of policy combines a death benefit with a savings account that can be invested at the policyholder's discretion. Like whole life insurance, it offers fixed premiums.

* More investment options

* Investment risk assumed

* No fixed return

* Potential for high returns

* Death benefit determined by investment performance

* Less expensive

* Requires active participation

* Popular among 30- to 45-year-olds

Other types of insurance include:

* Term Insurance

This option covers the insured person for a certain period of time--the "term--specified in the policy. It pays a benefit to a designated beneficiary only when rite insured dies within that specified period, which can be one, five. 10, or even 20 years. Term life policies are renewable but premiums increase with age.

* Universal Life Insurance

This type of policy also combines a death benefit with a type of savings vehicle. However, premiums are flexible and death benefits can be changed during the life of the policy, within limits.

SOURCE: INSURANCE INFORMATION INSTITUTE AND INVESTORWORDS.COM