By Tim Courtney, Chief Investment Officer
Over the last several years, traditional investors have gained access to a wider range of investment options than ever before. Competition, financial innovation, and advances in technology have opened the door to private assets (debt, real estate, equity), alternatives, and specialized tax strategies that were once open only to institutions and the most sophisticated investors. While this bigger toolkit creates better opportunities for a wider range of investors, it has also made investing more confusing. It makes understanding the role each investment plays in a financial plan increasingly important.
At a high level, most investments can be grouped into three categories based on what an investor needs them to do. The first is preservation of assets. These are intended to maintain value and provide reliable income and typically include cash equivalents, bank deposits, higher quality bonds, and lending that is senior or at least partially secured.¹ The second category is growth assets. These are typically stocks and private business ownership and are meant to increase the investor’s purchasing power over time.² The third category is inflation protection and risk hedging. This group includes hard assets like real estate and infrastructure and alternative strategies that do not behave like traditional stocks or bonds.³
In recent years, insurance companies have introduced products that attempt to address all three objectives within a single investment. They are often marketed as offering downside protection, growth participation, inflation adjustments, guaranteed income, and death benefits, sometimes with the added appeal of tax-advantaged or tax-free income.⁴ As a result, they are usually positioned as all-in-one solutions designed to meet nearly every investor's need.
But as we know, there is no free lunch and every benefit comes with a cost or a tradeoff. Products designed to limit downside risk typically do so by restricting upside potential, while insurance products have improved over time, many can be highly complex with lengthy rules and restrictions.⁵ Internal costs, including insurance charges and policy expenses, are often embedded within the structure rather than disclosed. Over time, these costs can materially reduce returns, even during favorable market environments.⁵
This has been highlighted by a widely publicized lawsuit by NASCAR driver Kyle Busch, who purchased one of these products designed to provide downside protection, growth, inflation protection, a death benefit, and tax-free withdrawals in retirement.⁶ In his case, $10 million in deposits had been reduced to about $2M over just a few years, probably due to the costs of the policy’s death benefit, which was not managed properly.⁶
Insurance remains an important component of financial planning. But one product cannot solve all problems. If you own or are considering one of these, a review can help clarify how it might fit within your broader plan. Please reach out to your Exencial advisor if you have questions.
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