Variable life insurance was once a stepchild of the life insurance industry, but the stock market boom of the 1990s changed all that: More investors viewed them more as an equity play than a mere insurance policy.

Offering tax-deferred investments and separately managed subaccounts at a time when the equity market was booming, variable products soared in popularity to the point where, in 1999, variable life surpassed traditional whole life insurance in market share for the first time.

"Basically, they became institutional clones of their mutual fund counterparts," says Herb Daroff of Baystate Financial Planning in Boston.

So with the decline of the equity market, it wasn't exactly surprising that the growth of variable products slowed in the fourth quarter 2000, or that slower growth is expected in first quarter 2001 results.

Some think insurance agents are steering clients away from variable and back to traditional whole life insurance. "This year, with the market volatility, there's been a lot more agents going back to their roots," Daroff says.

Now, as the dust clears from the equity market's boom and bust, there's disagreement over the role variable products should play in the financial-planning process.

Some feel variable was oversold during the go-go 1990s, to the point where policies were grossly underfunded on the assumption that capital appreciation would sustain them. When the market slid, many clients were forced to pay higher premiums or terminate their policies.

Others maintain variable life should be viewed as a way to purchase insurance protection and get equity-style returns on the cash value. For investors who have run out of other options for tax-deferred investment, this can look especially attractive. As long as the subaccounts of a variable policy are well-diversified, a policyholder should be well-protected during down markets, they say.

The fear among these proponents of variable life is that cautious advisors and insurance agents are now steering clients away from variable life as an overreaction to the bear market. "The sales of any variable product, like those of any security during times like this, are going to be down and people are going to be hesitant," says Ray Ferrara, president and CEO of ProVise Management Group Inc. in Clearwater, Fla. "However, a variable life insurance policy is a very long-term investment for most people, and they should view it as such."

Just how far investors are moving away from variable life will become clearer as the year goes on. In the fourth quarter, variable life sales were up 16%, which represented a slowdown from the year before, when sales grew 25%. First-quarter figures were due to be released in May, and one official familiar with the report says privately the results will reflect a continued slowdown.

This comes after a 1999 in which variable life products gained a 31% market share of all life insurance policies, compared with 29% for whole life. It was the first time since variable life was first introduced in 1976 that it surpassed whole life in popularity.

Advisors who are advocates of variable life say they expect its growth to continue. The reason: It gives their clients more options.

A common use of variable life, they say, is for someone who has fully funded a 401(k) and IRA product, and who is looking for further tax- deferred investment vehicles. Variable life gives these clients a place to put their money into separately managed subaccounts, with the added option, in most cases, of being able to take loans off the account at extremely low interest rates and make tax-free withdrawals of the policy's cash basis. For these privileges, variable policies typically carry expensive premiums and no minimum guaranteed rate of return on the investment part of the policy.

Arlene Moore, senior partner of Financial Strategies of Southwest Florida, in Sarasota and Tampa, Fla., says she commonly uses variable life products for young families who have exhausted tax-deferred accounts in an effort to save money for college tuition or another goal. "It allows them to get into the market without being taxed on their gains," she says. "It's almost like becoming your own bank."

The expense of variable policies makes them far less efficient than mutual funds as stand-alone investment vehicles, says Alan McKnight, vice president of Kays Financial Advisory Corp. in Atlanta. But for someone who also needs some life insurance, variable life makes a good "third tier" alternative for cash accumulation, behind equity investments and retirement plans, he says.

Variable universal life often gives customers a lot of flexibility in determining and adjusting premium levels, which sometimes can be a trap, some advisors say. One of the reasons the industry is seeing a backlash to variable life insurance policies is that too many policies were underfunded in recent years, Daroff says. The reason: overly optimistic capital-gains expectations when the polices were drawn up.

According to the laws governing insurance illustrations, such policies can project no larger than a 12% annual return. The problem, Daroff says, is that too many policies were opened assuming a maximum return would offset a bare-minimum premium and fully fund the policy. That has left many policyholders with two choices: pay a higher premium or terminate the policy.

"You could easily see a doubling of premiums," Daroff says. "They are left with either putting more money in or losing the value they've already put in."

As an example of how broad a range of premium levels a customer may encounter, Daroff says one $2.7 million policy for a 70-year-old client allowed premiums ranging from $80,000 to $270,000 a year. "Some people were not really taking into account this kind of market, who assumed 20%, 30% or 40% returns were rational and would sit back and assume 12% and not worry about it."

Norse N. Blazzard, chairman of the Variable Life Committee of the National Association for Variable Annuities (NAVA), agrees, saying, "I think that underfunding is one of the most serious problems you have with any universal policy ... They should never be underfunded," he says.

That's why many advisors tell their clients to front load their variable universal policies with maximum premiums at the outset. McKnight, for example, has a $250,000 variable universal life policy that allows him to pay as little as $300 per month in premiums. Instead, he pays $10,000.

The reason to maximize premiums, he says, is to weather weak equity markets. "At that level, I don't care what the market does, because you're going to be diversified in the subaccounts anyway," he says.

At least theoretically. Linda Yows Letiz, co-owner of Pinnacle Financial Concepts Inc. in Colorado Springs, Colo., says she's seen cases in which policies have been too overweighted in technology and emerging markets.

"I would hope that if the market continues like this, people who already have them will diversify their portfolio around them, rather than getting out of them," she says.

While the popularity of variable life probably had much to do with how similar the policies are to securities products (they're the only insurance product regulated by the Securities and Exchange Commission), insurance industry officials are now striving to point out the many ways in which they differ from securities.

NAVA is preparing an education campaign, which it plans to take out into the field, to make sure agents and advisors are aware of the differences, says Blazzard. He notes, for example, that one key advantage a variable life policy offers is the ability to constantly change investment mixes without the capital-gains tax liability associated with a mutual fund.

Blazzard feels both consumers and professionals are missing points such as these. Variable life sales are down, he says, "because most people think of it as being purely an equity play."

Some maintain that the sale of what is essentially an equity product, by sales agents used to marketing only traditional insurance, lies at the core of the problem. Keith Hallman, senior financial planner with Madison Financial Group in Atlanta, says he's seen no resistance to variable life insurance among his clients. He attributes that to their understanding of the stock market and its ups and downs.

"You have to remember that your average insurance guy is not an investment expert and hasn't been using this product very long. This may be the first bear market they've been through," he says. "The veterans in the investment business who are also insurance professionals know this for what it is-just a natural occurrence in the marketplace."

Likewise, Jim Barnash, vice president of Lincoln Financial Advisors in Chicago, says his firm has seen no falloff in variable life polices. In his office, sales of such polices increased 118% in the first quarter, he says.

Despite the market, he says, clients understand the long-term nature of the policies by working with advisors on a regular basis. "The key aspect is you can't put money in there and not pay any attention to it again," he says.