Q&A with CMMB Securities

Q. I’ve noticed some insurance companies offering investment options with their life policies. How does that work and is it a viable investment alternative? 

Camille,
Port-of-Spain  

A: Insurance companies, in an effort to customise their product offerings, have moved away from traditional life policies such as single-premium, whole life and term life in which the insured or the insured’s family receives fixed rates of return on the cash value. They have begun to offer more flexible policies called investment options. One such policy is the Universal Life policy in which the term life portion of the policy is separate from the investment or cash portion of the policy. The investment portion of the policy is invested in money market funds as opposed to stocks, bonds and mutual funds. The cash value portion is an accumulation fund to which investment interest is credited and from which death benefits are paid. Another policy which offers investment options is the Variable life policy. Like Universal Life insurance, part of the premium payment goes toward the term life portion of the policy, part to administrative expenses, and part to the investment or cash value portion. There is a major difference between the investment portion of Variable Life and that of other forms of life insurance.

With Variable Life, the insured person (you) is able to choose how to invest the funds in the investment portion of the policy. The insured may select from an array of investments such as stocks, bonds and mutual funds, as long as they are within the insurance company’s portfolio. Usually, there are a few times during the year that the insured person may modify his/her investment selections. Variable Life insurance is generally more expensive than other forms of Life insurance. Policies with investment options are a viable investment because they provide you with investment discretion over the cash value portion of your policy. Variable life policies also offer you the flexibility to design your own portfolio together with the security of a guaranteed death benefit. As long as you pay your fixed premiums, your death benefit cannot go away. This is not the case with Universal Life Insurance. Variable life policies also offer some protection from capital gains tax as no gains are realised until the policy matures. Investors, however, should ensure that their investments are adequately diversified in order to protect against times when the market is down.

Q: What is an index fund? 

Satish, Diamond Vale  

A: In order to understand what an index fund is, you must first define an index.  A stock index is a capitalisation weighted price average of the shares according to certain criteria. For example, in the United States, the Dow Jones Industrial Average is a weighted average value of 30 shares concentrated in the industrial sector. Investors can expect that the return on the mutual fund is at least as good as the particular index. Therefore, if the return on the S&P 500 is 10 percent per year, then the performance of an index fund based on the S&P 500 should be at least 10 percent after fees. If the return is less, an investor should not be investing money in the index fund and paying a portfolio manager fees for his/her expertise as the alternative is simply to buy a pure index that would pay the same return without having to pay fees.  An index fund is suitable to investors who want a diversified investment portfolio, but would also like to benefit from the experience and expertise of portfolio managers who may be able to earn a higher rate of return.

Disclaimer for Articles:
All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgement as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever. CMMB and/or its employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed, shall be construed to be, or constitute an offer or a solicitation to buy or sell.