(MONEY Magazine) – Q My adviser wants us to invest our money in a variable life insurance plan, where we can avoid taxes. Would it be better to buy term life insurance and invest in mutual funds? --Jason Keck, Three Springs, Pa.
ANSWER In a word, yes. Here's why: Variable universal life--the most commonly sold variable policy today--gives you life insurance in combination with tax-sheltered investments for retirement. But it does neither job well. That's because most variable policies are extremely expensive and bewilderingly complicated.
For starters, as much as 75% of your first-year premium may go to pay sales costs, premium taxes, and other expenses, according to Jim Hunt, life insurance actuary for the Consumer Federation of America. You also face annual charges for the cost of insurance, which vary widely, and asset management fees, which can total 1.5% or more annually. All those fees explain why advisers love to pitch VUL--and why most people should avoid the policies.
As for the promised tax-free withdrawals in your retirement, well, they're really just loans against the policy, and they remain tax-free only as long as the policy is in force. In the event that your withdrawals and a bad market conspire to shrink your account so low that it doesn't cover your insurance charges, you may have to keep paying premiums for longer than you expected. If the policy lapses, your gains would become taxable at ordinary income rates. If you need life insurance, buy a low-cost term policy. And for your retirement savings, stick with your 401(k) or tax-managed mutual funds.
Q I am looking for a way to invest in Asian real estate. Are there any funds or ETFs that give small investors access to this market? --Andy Gorel, Simpson, Pa.
ANSWER Not exactly. There are no funds or ETFs exclusively devoted to the stocks of Asian real estate companies. But that's probably just as well, since betting on the performance of a single industry in a single region is very risky, as investors in Asian stock markets discovered in 1998, when a currency crisis sent asset values into a tailspin.
But there are a growing number of funds that invest in real estate abroad, not just in Asia. And these funds can make sense in your real estate allocation.
"Overseas real estate markets move in different cycles from the U. S. market," says Chris Cordaro, a financial adviser with Regent Atlantic Capital in Chatham, N.J., "so they offer a way to diversify away from U.S. real estate." Two no-load funds to consider: Alpine International Real Estate (EGLRX) and Fidelity International Real Estate (FIREX). They recently had more than 30% of assets invested in Asia.