“Whether you’re buying your first life insurance
policy, purchasing supplemental coverage, or trading in
an existing policy, it’s important that you understand
what you’re getting, giving up, and paying for.”
- Nancy Lloyd, author of
Simple Money Solutions
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.
Benefits:
- 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.
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