Insurance companies are the only providers allowed to issue investment products that offer insurance guarantees. These are not government guarantees–the way the FDIC guarantees your bank account. These are guarantees offered by the insurance company based on its financial stability and ability to pay claims. So it’s important to evaluate not just the insurance product but the company offering it as well.
The following is a primer to help you understand the role an insurance company plays when you include one of these types of accounts in your investment portfolio:
Services: All offer portfolio manager interviews, individual portfolio profiles, and investment information and tools; some offer Web site account access.
Products: Immediate and deferred annuities, and various forms of investment-oriented insurance products such as variable life insurance.
Payment: Front and back-end sales commissions, early withdrawal penalties, mortality and expense fees, annual administrative fees, and investment fees on cash value accounts.
- Not every financial professional can sell insurance products–they must undergo special licensing procedures and be appointed by the individual companies whose products they sell. Because of this, you are more apt to buy from someone with insurance industry experience and/or knowledge, rather than an investment representative who sells a host of products with which he or she may not be very familiar.
- Insurance products generally offer specific guarantees backed by the claims-paying ability of the issuing company. This can provide more peace of mind than investing in completely unsecured products.
Disadvantages: Insurance investment products, and therefore the companies themselves, are often criticized by financial experts for having high investment fees. You and your advisor should determine if an annuity or other insurance policy is appropriate for your situation and then shop around for the lowest fees. Keep in mind, however, that insurance fees are generally higher than other investments because they are designed to cover various death benefit and fixed account guarantees offered by the insurance company.