Some Life Insurance Offers a Tax-Deferred Investment : Earnings: Whole, universal and variable life policies build a cash value that you can use for any purpose while you’re still around. But taking the money reduces the payoff amount to your survivors.

Life insurance more accurately could be called death insurance, but that’s a far less marketable name. You would have a hard time thinking of death insurance as a great, tax-deferred investment now, wouldn’t you?

These days, that’s how cash-value life insurance is sold. It’s a death benefit plus a tax-deferred investment. Sure, the agent talks up the importance of coverage for your loved ones in the event of your untimely death. But the heart of his sales pitch for a product like “variable insurance” focuses on the policy as an investment you will live to enjoy yourself. Assuming that he’s right, how good an investment is it?

All cash-value policies provide two things. One is insurance for your beneficiaries if you die. The other is a cash value that grows tax-deferred and that you can tap during your lifetime. But you can’t have your cake and eat it, too. Any money you take out reduces the death benefit for your survivors.

This kind of insurance comes in three basic varieties: whole, universal and variable life. All three allow you to defer taxes on the cash buildup. Both whole and universal have an investment component that earns a fixed rate of return determined by the insurer, with a guaranteed minimum of about 4%.

Variable life insurance differs in a few important respects. First, you make the investment decisions yourself, choosing from a smorgasbord that typically includes several types of mutual funds as well as a fixed-rate option. There is no minimum guarantee, but variable offers the possibility of capital appreciation.

Also, unlike universal or whole life, variable life insurance is governed by Securities and Exchange Commission regulations. The agency doesn’t permit the exorbitant sales commissions--sometimes 100% of the first year’s premium--typical of whole life and universal policies. You do, however, get charged various fees for carrying out your investment decisions.

“The administrative and money-management fees on variable are significantly higher than those on universal and whole life,” says James Hunt, a director of the National Insurance Consumer Organization. In fact, many companies would rather sell variable policies because they can make sure-fire money from carrying out your instructions instead of taking investment risk themselves, which they must do with a whole life or universal policy.

Because of the higher fees, a variable life investment must outperform universal life--currently earning 8.25% to 9.25%--by at least 1% annually to do better over the long term.

But how does buying a variable policy stack up against keeping your life insurance and your investments separate--buying a much cheaper term insurance policy, which has no cash buildup, and investing in a taxable no-load mutual fund? The answer: Pretty well, if you hold the variable policy for 20 years; not so impressively if you hold it for 10 years, and very poorly if you hold it only 5 years.