Understanding Insurance and Annuities

Even the neophyte investor is probably familiar with insurance and annuities.  More than likely, at some point they have been approached by a salesman offering such an investment.  One reason these two are so common is because the individuals selling them easily outnumber those selling traditional stock and/or bond investments.   Many in the investment world have a negative view of the insurance product and slightly less so the annuity.   Most of this perception comes from the fact that both come with a heavy sales load which compensates the representative directly just for signing up someone.  This aspect of compensation has lead to some more than questionable sales tactics among a small number of sales representatives of these two products.  However, despite the sales load and tactics of the representatives, the insurance and annuity both deserve a place in the portfolio of most, if not all investors.  The fact is these two instruments provide unique benefits found nowhere else in the investment world.  We will discuss the basic features of both below and also give guidelines to determining their appropriateness to your portfolio.


There are many types of insurance of course.  We will restrict this discussion to life insurance only since it is the most common alternative investment vehicle.  We say alternative, only to distinguish the fact that money invested within insurance has rules and stipulations applied to it unique to that product.

Briefly, it is important to know that there are two types of insurance. There is "Term Insurance" and "Whole Life" insurance.  These are not the same thing.  When we discuss insurance as an alternative investment we are most often referring to "Whole Life" which builds up a "cash value".  Since "term" insurance has no cash value it is not considered an alternative investment.

Insurance is an important part of a financial plan from the standpoint of giving your family an immediate financial windfall upon the demise of the insured.  This allows them the benefit of not having to deal with pressing financial matters at such a time in addition to providing money to cover the loss of a working member of the family unit.

Many people see insurance as an "investment" solely no different than other investments such as stocks, bonds and mutual funds.  This is simply not true.  Insurance does have certain features similar to traditional investments but the fact that it is paid upon a loss differentiates it from everything else.  Additionally, the return on an insurance policy can never compare to a return in the standard stock or bond or mutual fund when considered in aggregate.


Annuities are only sold by licensed financial professionals.  Thus, they are not as widely known or maligned as the standard insurance policy.  Annuities are most often sold to give an income supplement on behalf of the purchaser investing a lump sum of money.  The various forms of annuities allow the investor to choose investments themselves or the investments are chose by the company. 

The key role for an annuity is in the supplement to a retirement plan.  It allows the investor to put money into a vehicle, which will later pay off income upon retirement.   Money removed from an annuity early is sharply penalized.  Therefore, investors should be sure they are making the proper choice before investing their money. 

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.