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Variable Life Insurance a Last Choice Among Retirement Plans


Q: I am a 32-year-old attorney with a wife, two children and my own law firm. I am in the process of setting up some form of employer-funded retirement plan and my insurance agent (and family friend) is telling me I should buy variable life insurance. The way I see it, variable life insurance is silly because your investment is with after-tax dollars and, to make matters worse, part of your "investment" is used to purchase a term insurance policy (at higher rates than I'm paying now) with the rest put into a captive mutual fund. While I have pretty much convinced myself that variable life insurance is not for me, my wife, who trusts the agent, thinks I don't understand the product and says our friend would not steer us in the wrong direction. What do you think?


A: I think even the best-intentioned insurance agents can get excited about a product and not realize that it isn't the best fit for a client. Less well-intentioned agents might care more about the commission than about making sure you get something that suits your financial needs.

Variable life insurance--a life insurance policy that combines a death benefit with an account that can be invested in stocks, bonds and cash--can be a reasonable, if relatively expensive, option for high-income people who need life insurance and who have already exhausted other tax-deferred ways of saving for retirement. That means people who have contributed every dollar possible to a 401(k) or other retirement plan at work and invested $4,000 a year ($2,000 each for themselves and their spouses) into a Roth IRA--and who still want to save more.

The earnings in the investment portion of a variable life insurance policy are tax-deferred until withdrawn. That tax deferral comes with a price in the form of higher fees and costs than you would pay for equivalent mutual funds. And as with mutual funds, you bear the risk if your investments don't perform well.

It's not clear from your letter whether your agent is urging you to buy this policy in lieu of a retirement plan or in addition to it; if it's in lieu of, thank him and resolve to restrict contacts with him to social events. Seek out a financial planner, preferably of the fee-only variety, who specializes in setting up retirement plans for help in getting a 401(k) or other savings program started at work.

If the agent is suggesting this policy in addition to a retirement savings plan, have the planner review it and see whether it meets your needs. If it's as great a deal as the agent thinks, he should welcome the scrutiny.

Calculating Tax on Stock Inheritance

Q: I inherited stock when my mother died in December and recently sold it for $100,000. Will I have to pay the capital gains tax for year 2000 when I file my return? Do I need to know the value of the stock at the time she purchased it 50 years ago in order to calculate the tax?


A: My condolences on the loss of your mother. You don't need to know what she paid for the stock to determine your taxable gain; because you inherited the stock, you most probably will use the value of the shares on the day she died as your "tax basis." That basis is what you subtract from the sale price to determine your tax. You'll pay capital gains taxes of 20% on the profit, plus California state income tax of up to 9.3%, and you may need to make an estimated tax payment by July 17, depending on your tax situation. I'd encourage you to talk with a tax advisor.

A big item like that could increase your chance of audit and you would benefit from getting professional help.

Who Will Fund Social Security?

Q: In last week's column you state it takes six workers making $40,000 a year to provide a reader's current Social Security benefit. This doesn't take into account the employer contribution, which should reduce the number of workers needed, shouldn't it?


A: A few other sharp-eyed readers noticed that I did not include the employer's matching 6.2% contribution to Social Security when making the calculation.

I also didn't include the fact that our Social Security taxes pay for much more than retirement benefits. Our contributions cover survivors' benefits and disability insurance, as well as help balance the overall federal budget.

The situation obviously is too complex to be boiled down to a simple calculation, even for illustration purposes, and I shouldn't have tried.

What seems clear is that there will be fewer workers to support future retirees, and that alone probably will necessitate changes in how Social Security functions. I believe that for the system to survive, those changes will include less generous benefits for higher-income workers.

That's a belief, by the way, not a statement of fact. There are some who disagree and who believe that productivity gains, among other factors, will save the system. It would be nice if that turns out to be true. In the meantime, it's probably wise for today's higher-income workers to save for retirement as though their Social Security benefit will be minimal.


Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times' Web site at

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