Adequate insurance is critical, but can it be used as an investment tool? Some Mississippi financial advisors are not big fans of using insurance as part of an investment portfolio and suggest caution if doing so.
“We have not recommended insurance as an investment but preferred term insurance with a personal investment plan or IRA or 401(k) to self insure,” says Dudley Barnes, a principal with Raymond James Financial Services in Clarksdale. “The market does offer some low and no-load variable insurance products today that are attractive for those who want a bundled approach.”
Barnes, who’s in his 31st year in financial services, feels these variable products are a major improvement over products even a year ago.
Meeting a need?
Chris McAlpin of Financial Strategies Group in Jackson recommends insurance as part of an investment portfolio when there is a specific need. “Insurance and investments through insurance companies have their place in an investment portfolio,” he said, “especially when the investment is the proper choice and some type of protection is offered and/or an estate planning need is met.”
He says mistakes are made because insurance investments are designed to meet specific needs and can be very complicated investments.
“An investor should understand exactly what they are investing in — understand the reasons why this is being used and understand the total costs and risks associated with the investment,” he said.
McAlpin adds that a common mistake of investing in insurance is misunderstanding the investment. “The investor may be ‘sold’ on that choice,” he said. “They then do not receive the returns they expect, or worse, suffer losses on the investment. Another common mistake is using the investment to meet a need that it was not designed to meet.”
Woodridge Capital vice president Danny Williams believes insurance provides a valuable benefit for the appropriate situations, but is generally not something his firm recommends.
“I’m not a raving fan of insurance as an investment,” he said. “In most situations, non-insurance investments offer wider choices as well as lower expenses. Variable annuities seem to be talked about a lot in the investment arena. Again, usually high expenses, lots of moving parts that make them complicated to know what you are really buying, and last but not least, the broker/advisor receives the highest commission when an insurance-type product (including annuities) are sold.”
Once they are sold, he adds, the investor usually receives little to no future investment advice on the underlying investments, and the expenses are very high once an insurance wrapper is placed on an investment portfolio, including variable annuities.
Managing the risks?
“We also have an incredibly hard time managing the risks of the investments within the plan in that situation,” Williams said. “While the sales people who sell annuities and other insurance investments make them sound good, there are trade-offs that must be considered very carefully. Once these trade-offs are really understood, and that is the key, the advisability of using insurance as an investment tool goes down dramatically.”
Consider the alternatives, too
Before investing in insurance, Williams recommends investors talk to someone not affiliated with an insurance company. “It should not be surprising to be sold insurance if you go to someone representing an insurance company,” he said.
He also recommends comparing non-insurance alternatives to insurance, making certain you understand all that you can about the investment.
“I have seen people invest in an annuity and shortly thereafter tell me they have no idea what they own,” he said. “If a client is dead set on using insurance products as an investment, then we advise them to first of all find a knowledgeable insurance salesperson or brokerage firm employee and get that person’s recommendations.”
After those recommendations have been made, Williams suggests the investor read all of the paperwork involved and understand it. Then, he will offer to explain any questions related to this insurance investment contract.
Contact MBJ contributing writer Lynn Lofton at firstname.lastname@example.org.