Q. After reading about the future economic possibilities for the boomers--- the big deficits for Social Security, Medicare, etc. and the probability that future taxes will be higher--- I'm wondering if it makes sense for me, age 50, to look at buying a Flexible Premium Variable Life insurance policy on my wife as an investment. She is 48 so her premium would be less than mine and I already have a policy. What should I look for in considering one of these policies? By the way, I have already invested in IRA's and have $400,000 in my profit sharing plan, so I am looking for other ways of investing and growing money that may not be affected by pending economic changes.

---J.G., by e-mail from Dallas


A. An important feature of variable life policies is that you can borrow against your cash value and it is a non-taxable event. This makes them very appealing. Unfortunately, all of the cash value in excess of your premium payments can become taxable if the policy is allowed to lapse. The problem is that the cash value you build inside the policy must serve two masters. First, it is a fund for the insurance company that pays the annual cost of life insurance. This cost rises every year. Second (and only second) it is a fund for your living benefits.   The combination of policy loans to support your standard of living, rising internal expenses, and a down market can put you in big trouble.

As a consequence, I prefer asset wealth that is accessible and realized. We should be looking for liquidity (cash we can get to) with minimal contingent liabilities, such as taxes.

What kind of wealth is that?   Start with the things that provide you with "imputed" income in non-cash services such as your house, appliances, and your car. It is also pre-paid expenses, cash, and a healthy inventory of consumption goods such as clothing. It is also life annuity incomes purchased with taxable dollars so that only a portion of the monthly cash payment is taxable income.   Finally, it is liquid investments with a high cost basis--- investments that can be sold with minimal tax consequences.


Q. My father and mother are retired (age 60 and 59 respectively). My father collects a company pension and my mother collects a teachers' pension. They own their home outright, have no debt (except for maybe a car note), have sufficient savings, and enough insurance. My father has a relatively sizeable 401(k) account and he is looking to roll all or part of it over to an Equity Indexed Annuity.

These annuities seem to promise equity-like returns with protection of principal, a hot selling point for those burned during the recent bear market. I say they are too complicated, charge too much in fees, and are poorly understood by those who buy them and the majority of those selling them. Even though I am an investment professional, my advice against this product is falling on deaf ears. Can you help? They currently do not need this for income.

---D.J., by e-mail from Houston


A. You summarized the problem with this product very nicely--- "too complicated, charge too much in fees, and are poorly understood by those who buy them and the majority of those selling them." Much of what is given in the big print--- market returns without the risk--- is taken away in the small print.

Since there are dozens of these products, many sold with hefty commissions (try 12 percent), you'd have to read the fine print in each contract to understand how and why the return is likely to be much less than the big print would lead you to expect. Let me give you two examples of how the return you wish for is reduced:

•  In some contracts your return is limited to the capital appreciation of the given index. This may seem trivial, given current low dividend yields, but dividends have historically accounted for a large part of common stock returns. According to Ibbotson Associates, the Boswell of investment returns, the total annualized return on large common stocks from 1926 through 2003 was 10.4 percent. Of that amount, 5.9 percent came from price appreciation. The remainder came from dividends. Excluding dividends takes quite a bit off the upside.

•  In other contracts your return may be capped at a certain amount in any given year, such as 10 percent. If stocks appreciated steadily at 7, 8, or 9 percent this wouldn't be a problem. But stock prices fluctuate. The Ibbotson Associates data tells us that in the 77 years since 1926, large common stocks have returned over 10 percent but less than 20 percent in 13 years, over 20 percent but less than 30 percent in 13 years, and over 30 percent but less than 40 percent in 13 years. In another 5 years the returns were over 40 percent. That's 44 years in which the Equity Index Annuity investor would have lost most of the upside of common stocks. There were also only 11 years in which the return was between 0 and 10 percent. And there were 23 years in which stocks lost money.

Giving up 44 years of upside is a high price to pay to avoid 23 years of downside.