Everyone watching Wall Street is worrying about their investments. They ought to worry about their life insurance policies too.

If your life insurance contains an investment component, as is the case with universal and variable policies, market fluctuations could affect your policy and your premiums.

"The economy does affect all types of insurance," says Jack Rittenhouse, vice president of the National Association of Estate Planners and Councils. "A policy like a universal or variable policy is very tied to market results."

With variable and universal policies, the investments are meant to grow as the policy ages, offsetting premiums. When you buy the policy, your agent will give you a projection of what your policy will be worth years down the line. But if the investments don't grow or if they just don't do as well as originally predicted, you may have to make up the difference, reduce the face value of your policy or risk losing your coverage.

"People typically rely on cash value to pay the premiums," says Jack Dolan, spokesman for the American Council of Life Insurers, an industry group. "And if the policy is not performing as well as you had hoped due to a market that has declined, then the individual obviously has to pay the premiums."

But there are a couple of things you can do to guard against that scenario, according to industry experts. First, make sure you buy the right policy. If you have a low tolerance for risk, stay away from variable policies.

"If you can't afford to increase your premiums later on when there is a downturn in the stock market, you should not use a variable product," says Paul S. Graham III, chief actuary for the ACLI. But Graham, who has his own variable policy, says the products have a financial upside too. "What I'm banking on is that over time the cash value will grow to the amount that I don't have to pay premiums at all."

Tend your money
Unlike term or even whole life, a policy with an investment component needs some care now and then.

"You have to pay attention in down years to make sure the growth of the reserve fund is sufficient to maintain the death benefit set up by the policy," says Rittenhouse, also an agent for New York Life Insurance Co.

Your insuring company will send you statements, at least annually, that sum up how the investments are doing. Many companies also have Web sites that will let you check on the progress of your account as often as you like.

"Spend a couple of hours a month following the market, so you know what the market is doing," Graham says.

Find out what the dangers are for your particular policy. For example, regular universal life is seen as a pretty stable product, says Graham. "But if the actual interest rate you earn is less than the interest rate it was assumed you'd make" your account might need some fine-tuning.

If you have an established account, "The money you've put in the policy already [should be] locked up at the [assumed] rate," he says. The real danger would be "if there was a prolonged recession with interest rates below 3 percent," Graham says. Read carefully, ask questions. And don't be afraid to ask "what happens if ...?" he says.

Diversify -- and ask for help
Usually, the same conditions that boost stock prices are less advantageous to bonds, and vice versa. Just as with retirement and investment accounts, it pays to spread your money throughout a variety of different options -- stock funds, bond funds, etc. -- and hedge your bets.

"[An investment-based insurance policy] should not have been purchased for the short-term perspective," says Ed Graves, chair of life insurance for the American College in Bryn Mawr, Pa. "It's designed to take care of savings in a marketplace that's up or down."

"It doesn't hurt to spend a small amount of money to help make this decision," says Dennis Kroner, president and CEO of Pitt, Ryan & Linnear Ltd., a Chicago CPA and financial planning firm "It's always a good thing for someone making investment decisions to go to an investment professional."

When the going gets rough
If you already have a policy and want to scale back your risk, you have several options. Most companies will let you change your investment strategies within your existing policy fairly regularly. You can opt for a less aggressive strategy or simply diversify your selections.

Many companies will also let you roll your variable or universal variable policy into a whole life or regular universal policy. Done properly, there shouldn't be any tax consequences, says Graves, who advises consumers to investigate rolling the policy within their current company first.

There will likely be some costs, and you may have to qualify all over again, says Rittenhouse. "To my knowledge no company lets you [replace policy types] without furnishing evidence of insurability at the time of the switch," he says.

But Graves disagrees. If the insurance company sees that the move is decreasing their risk -- for instance the face value of the new policy is less than the cash value of the old -- there would not likely be a recertification requirement, he says.

And before you think of dumping your policy, remember why you bought the coverage in the first place, Graves says. "If the reason is still valid, you still need coverage. And it's very expensive to drop it. You should stand in good stead if you're managing your portfolio properly."

"I would never agree that a life insurance policy should be looked at as an investment," Rittenhouse says. "It's a life insurance policy."

Dana Dratch is a freelance writer based in Atlanta.

-- Posted: Sept. 17, 2002