Recently, I came across two families who were sold cash value life insurance as an investment.

The first couple was sold a $150,000 whole life policy on their daughter two years ago to help pay for her college education. After paying $1,600 in premiums, this policy had a cash value of zero. When I showed them in the policy where that information appears, they were outraged.

A cash value life insurance policy isn't an appropriate vehicle to pay for children's college expenses. The suitable vehicle is an asset-allocated mutual fund as an education IRA. Children need just enough life insurance to pay for a funeral, which can be purchased as a child term rider on a parent's term life insurance policy.

The husband and wife in this family both work, yet they had less life insurance on their lives than on their daughter because they were sold high-premium-for-low-coverage cash value life insurance. Had either of them died, the amount of coverage they had would only replace three years of their annual incomes. These healthy, 40-year-old, non-tobacco users were spending $250 monthly for their coverage.

They were told that their life insurance doubled as retirement plans. They weren't told that if they needed the accumulated money in their policies, they'd have to borrow it, pay interest on the loan, and might have to wait up to six months to get the loan. They also weren't told that if they died with an outstanding policy loan, that the loan would be subtracted from the death proceeds; or that if they died, their beneficiaries lose and aren't paid the accumulated cash value within their policies.

Breadwinners with dependents and debts should buy lower cost term life insurance. For retirement, they should invest in an asset-allocated, tax-qualified mutual fund.

The second case involves a man who was interested in saving money to start a business in the future.

Nine months ago he was sold a $300,000 whole life insurance policy for a monthly 
premium of $285.85. Recently, Gerry called his agent to find out how much money his policy had accumulated after having paid $2,573 in premiums. He was told that there was nothing. Like Izzy and Norma, Gerry was outraged. The man was told he should continue to pay for his policy to give it time to accumulate money. However if he keeps paying for it, after two years he will still have nothing after having paid in $6,860.

He says he was told that his policy was a combination life insurance-investment policy that accumulated money just like a savings account at a bank. Now he is trying to get some of his money back and believes that he was a victim of deceptive sales practices and inadequate disclosures.

In 1979, when the Federal Trade Commission investigated the life insurance industry, the industry stated that "whole life is not partially insurance and partially savings, it is wholly insurance." A 1984 update of that report stated, "insurance consumers continue to suffer tremendous economic injury on a grand scale from inadequate disclosures and deceptive sales practices."

Article 21.21 of the Texas Insurance Code, which all agents study to get their license, reads: "Commissioner's Order 35848 prohibits: description of individual insurance ... which use the words 'deposits,' 'savings,' and 'investment,' as unfair methods of competition or as unfair or deceptive acts or practices ... ."

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Raul Amaya / Guest Columnist

Raul Amaya is a financial services entrepreneur. He may be reached at 383-7732 or by e-mail at raula.1@juno.com

Copyright 2006 by the El Paso Times and MediaNews Group and/or wire services and suppliers.