Structured Notes versus Equity-indexed Insurance

When I had clients, I often discussed with them how it was that Indexed annuities and Indexed life or Long-term Care insurance could guarantee no principal loss while offering a part of the return from some equities or bond index. We would discuss this complex invention and how it could be used to hedge the risk of market fluctuations on their most crucial portions of their savings. The level of depth of these discussions varied with the client, but they always knew that delivery of the promised minimum returns and principal protection was dependent upon the carrier’s strength. They almost always went for the guaranteed income at the other end of the guarantee period because being confident in matching guaranteed income to guaranteed-to-incur living expenses was prudent.

Once in a while, however, the light would shine brightly in a client’s or prospect’s mind and the person would say, “Well, if the insurance carrier can get these underlying contracts enabling such protections, why can’t I directly?”

The answer was always, “You can. These are called ‘structured notes or certificates.’ But only a carrier has a reserve that protects policy owners in event that these structured notes lose money or fail to gain. Carriers also assemble enough money to buy in bulk and to stagger the maturities closely so that they can honor withdrawal demands. Only life and long-term Care insurance enables payout of gain that is immune to income tax. If you own the structured securities without the insurance ’wrapper,’ then your earnings are not tax-deferred, favored payouts are not tax-free, you have no lifelong income guarantee and your principal guarantee is generally not backed by any reserve. I must say, as I do in The Secrets of Successful Financial Planning for one’s ‘Tier 3 cash reserves:’ These structured notes work well for known expenses at maturities generally ten years & fewer away (e.g., college expenses coming up starting in five years, and you want a shot at good returns but relatively low risk for funds allocated for college). So, for long-term or retirement investing, do you still want to be your own insurer and buy structured securities?”

More on the stand-alone (i.e., non-insurance) structured products at http://www.finra.org/investors/alerts/structured-notes-principal-protection-note-terms-your-investment and other tips and “fun stuff” at AuthorDan.com. Best to you from AuthorDan!

Published by

Dan Gallagher

Overview: Dan retired from financial services in December 2017 to work professionally as a writer, freelancer, speaker and educator. This is curtailed due to spine problems. During his practice, Dan’s professional designations included: Chartered Financial Consultant & Chartered Life Underwriter (1989), Certified Financial Planner® (1992) and Certified Business Intermediary (2002). Dan’s thirty-year financial practice encompassed group and individual benefits, money management, financial plans, business valuation & brokerage, commercial realty and – often very personal – counseling. He now relies on agent Bill Pettit to offer his works, especially fiction. Chronology: Dan graduated from Virginia Military Institute (1981), third among Economics majors, simultaneously completing the Modern Languages curriculum. He served in the Infantry, then as a reservist in a Special Forces support role, next as a Training Company Commander and later in a classified Army Research Institute role. Dan completed his Master of Business Administration at William & Mary (1986). He and wife Laura married in 1988, loved raising their four children, and assisted both Boy and Girl Scouting through their church through 2010. Dan has given numerous seminars at major employers and other entities including Delta Environmental Consultants (now Antea Group), Anheuser-Busch, Norfolk Naval Shipyard, Canon USA and small businesses. Charlotte Magazine selected Dan as a ‘2009 Five-star Wealth Manager.’ Dan was a panelist and guest speaker at the Charlotte Chamber of Commerce’s 2007 ‘Business Disposition Workshop.’ Dan is the author of a novel, a licensing manual, and numerous articles in journals such as Virginia Lawyers Weekly, Financial & Estate Planning, The Daily Press and The Virginia Gazette. Articles by and about Dan have also been published in the Charlotte Business Journal and Charlotte Ventures. His fiction and narrative nonfiction have been published by Skyhorse Publishing, Superversive Press, Millhaven Press, Creative Loafing, NFAA Archery (a humor short story), and Tuscany Bay Press.