Investment technology has evolved rapidly over the past several years. The most advanced and sophisticated methods of investment available today offer several different methods of “insuring” investment accounts for the future.
It seems that just about every purchase or financial transaction we engage in requires some type of insurance against loss. What most people don’t think about is that most of the insurance coverages we need and carry are there to benefit someone else – not
As an example, most of us carry some form of life insurance, and we all know that the beneficiaries of life insurance only receive compensation when the insured person is dead and gone. The life insurance gives us peace of mind, but really financially benefits someone else.
We all carry insurance against our homes being destroyed by fire, even though the chances of that happening are extremely slim. The mortgage company forces us to carry the insurance, so that they are sure to be paid should the place burn down.
Auto insurance is another example. We are required by the motor vehicle code to carry insurance when we own and drive a vehicle. However, the type of insurance we have to carry is the liability type. This protects the other guy against us doing something
wrong. We are not required to carry insurance to protect our own vehicle. The bank, or other lender, might require us to carry insurance to protect our own vehicle, but the law doesn’t require it. In addition, we all know about people who drive around without any insurance. Many of us carry insurance against these “uninsured” motorists.
In short, most of us carry insurance, usually protecting someone else, on our homes, our automobiles, our lives, and our health. However, most of us have not explored what types of insurance are available to protect our investments and retirement accounts. In many cases the amount of money in these accounts is even greater than the value of our homes.
Your financial planner or investment advisor should be telling you about what is available to insure your accounts. You should be given a choice of making your investments in programs that have some type of downside protection. If your advisors are not showing you these programs, then you are not getting the right kind of service
The types of coverage vary from company to company, and the ability of the company to make good on any claims is dependent on the financial strength of the particular company. You should only deal with the highest ranked companies for these programs.
Among the types of coverage available are ones that promise to return your investment after a certain number of years – usually 5 to 7 years – if the investments have declined in value over that time period. In order to reduce their risk, the company may require that your investments be placed in portfolios that are of a less volatile nature. In some cases, the company reserves the right to move your money completely out
of the market under certain circumstances when their models trigger such a movement.
Other programs offer a future stream of income. The income stream may be for a lifetime, or for a set minimum or fixed number of years. Often the income is based on the higher of several potential values. One value would be the current market value of the investment. Another value might be the initial investment increased each year by a
certain minimum amount – usually 5% to 7% per year. Still another might be what they call the “high water” mark, and that could be the highest value that the investment attained in the past. There is usually a choice involved where you would choose the highest of the values discussed here.
It is more important than ever that retirees explore these options. This is because of the fact that a married couple, age 65 and newly retired, stand an excellent chance that at least one of them will live into their 90s. This means that they could be looking at the need to provide income for at least one of them for the next 25 to 30 years. Their
investments need to be protected so that there can be some assurance that the “nest egg” will survive for that long period of time.
That all being said, is important to understand that equity investments tend to rise in value over time. Looking at the history of equity investments, it is obvious that, given enough time, they have always recovered from catastrophic drops in value. This is referring to pooled, or allocated investment vehicles, and not to individual stocks or
bonds. In the best of all possible events, it would never be necessary to call on the insurance protections discussed here. It would be great if your accounts just continued to go up and up. Unfortunately, there are times when this just doesn’t happen. When the stock market dropped tremendously in the early 70s, it took until about 1981 to get
even again. The drop that took place early in this century has not been fully recovered yet.
On the other hand, when the market dropped about 30% in just a few days in 1987, those who stayed with their plan were rewarded by a return to normal in about 6 months. We just never know what the future holds, hence the need for protection just in case a bad time comes just when you need your funds the most.
Talk to your advisors and brokers and become educated about what is available, what these programs cost, and make some decisions about whether or not you need to have some type on “insurance” for your investment and retirement accounts.
Bill Locklin, MBA, CFP
“Lifetime Income Strategies for Retirees Age 55 and Better”
951-67-2010; or, 1-800-266-2010 toll free - E-mail