Can I really get a 10% return from a life insurance policy?

NEW YORK (Money) -- A life insurance broker told me that if I put my portfolio in a variable universal life insurance policy it would be a great investment and tax shelter. I was also shown an illustration that my money will grow at 10% a year. Do you believe that a stock market investment will grow at 10% in such a policy? -- Todd C.

Mark Twain once famously noted that there are three kinds of lies: "Lies, damned lies and statistics." Some wags say that there's a fourth: life insurance policy illustrations.

To paraphrase the Geico Gecko: That's a complete dramatization, of course. But let's just say that the potential for abuses, plus the fact that policy illustrations can get pretty complicated even aside from any shenanigans, means you've got to be extremely wary of investing on the basis of one.

Essentially, an illustration projects the future cash value of an insurance policy based on a number of assumptions. One of those assumptions is the rate of return.

In the case of variable and variable universal life policies, you can typically invest in what are essentially mutual funds. The growth in the policy thus depends on which segment of the market your funds track and how well those areas perform.

But fees also come into play -- investment fees, sales and marketing charges and the cost of the insurance coverage you're also buying with the policy. These fees can be quite onerous and drag down your potential return.

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There's another complication: those fees aren't as cut-and-dried as you might think. The insurer actually has quite a bit of leeway in how much it can charge you for various elements of the policy.

For example, there are "current" insurance charges, which reflect the cost of life insurance coverage today. But a policy also has "guaranteed," or maximum rates. Those are much higher, and the insurer has the option of charging you up to the maximum in the future.

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All of which means that even if the stock market delivers 10% annually in the years ahead -- which seems optimistic based on recent forecasts by Schwab and the Center for Retirement Research at Boston College -- you are going to get less than 10%, perhaps much less.

As for those tax shelter benefits the broker touted, it's true that any gains an investment generates within an insurance policy aren't taxed as long as they remain within the policy.

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If you own the same investment in a taxable brokerage account, by contrast, you would have to pay income tax each year on any realized gains (unless you can offset them with investment losses).

I'd be surprised if the broker didn't also ballyhoo another potential tax benefit -- namely, a shot at tax-free returns via low- or no-interest policy loans that are eventually repaid with the policy's death benefit after you die.

While such an end run around the tax man sounds wonderful, there's also a big potential hitch. If you've drawn out large sums via loans and the policy later lapses, you can find yourself with a huge tax bill on your hands.

Frankly, I think that it would be a challenge for most investors to truly understand what's behind these illustrations. Yes, the Financial Industry Regulatory Authority has set some ground rules for illustrations that attempt to mitigate the potential for manipulation. But there are still plenty of ways to game the system.

Bottom line: I'm not a fan of mixing investing and insurance coverage. It's too complicated, there's too much potential for abuse and I'm not comfortable with the "trust me" aspects of these policies.

I certainly wouldn't even consider one until I'd maxed out tax-advantaged alternatives like 401(k)s and IRAs. And even if I'd done that, I'd still go with more straightforward options like tax-efficient index or tax-managed mutual funds.

But if you feel you still want to proceed, then I recommend that you pay an independent financial planner take a look at the policy first. If you decide to go ahead with this policy, just remember that the fact that someone shows you an illustration with an investment returning 10% a year in no way guarantees that's what it will actually earn.