The Securities and Exchange Commission yesterday approved two new trend-setting investment products: flexible-premium variable life insurance and a controversial mutual "fund of funds."

The insurance contract, approved by a 5-to-0 vote, is a hybrid product combining the benefits of life insurance and mutual fund investment.

A portion of premium payments would go into one of several mutual funds selected by the policy holder that offer differing rates of return and levels of risk. Instead of making level monthly premium payments, as ordinary life insurance policies require, a policy holder would have the option of reducing or even skipping payments if the return from the mutual fund were particularly good. The changes in premium payments would not change the value of the policy.

The other product, the controversial mutual fund of funds, won approval on an unusually narrow 3-to-2 vote. In an even more unusual move, the minority commissioners, James Treadway and Aulana Peters, asked to submit written dissents.

The controversy centers on reviving -- even in a narrow sense -- the once-discredited pyramid-type mutual fund -- one that invests in other mutual funds with the same directorship. In the late 1960s, the SEC halted sales of Bernard Cornfeld's European-based Fund of Funds, which was owned by Investors Overseas Service. His successor, Robert Vesco, later fled the country, accused by the SEC of looting IOS of more than $200 million. Congress reacted by outlawing this type of operation.

The SEC yesterday approved an application from the Vanguard Group of Investment Cos. to establish a Retirement Fund that would invest in some of Vanguard's 15 other mutual funds. The fund of funds would be offered for Individual Retirement Accounts and Keogh accounts. It is expected to offer investors a variety of choices so that, for example, they could be equally invested at one time in mutual funds based on stocks, bonds and money market funds.

The dissenting commissioners argued that Vanguard had not satisfactorily demonstrated the economic benefits to customers, or eliminated the possibility of conflict of interest that could occur when both the underlying funds and the fund of funds have the same directors.

In an effort to limit the control the super-fund could exercise over the underlying funds, the SEC ordered that the Retirement Fund not own more than 10 percent of the shares of any of the 15 other funds.