With the recent stock market correction, many investors have been painfully reminded of the risks they are taking in order to try to get healthy returns over the long term. That’s the bad news. The good news is that they may not have to take any market risks and still be able to outperform the market long term.
There is an asset class that was created in the 1980s called guaranteed indexed accounts (GIAs), which are part of the growing list of “structured products”. A structured product is one in which different assets are merged into one asset, thus providing the benefits of multiple asset classes in one asset.
GIAs are offered by both banks and insurance companies. The first GIA was created by JP Morgan Chase in the 1980s and was called an indexed CD (ICD). An ICD provides the safety of a CD with the upside potential of various markets (stocks, bonds and commodities). ICDs continue to be offered today by the largest banks, though usually not at the retail level. The one downside to ICDs are that they are not tax efficient.
Two other types of GIAs are offered by life insurance companies and are known as fixed indexed annuities (FIA) and indexed universal life (IUL).
FIAs offer the safety of A-rated life insurance companies and the contractual guarantees of a fixed annuity, and they provide the upside potential of various markets (stocks and bonds). They have the additional benefit of offering tax-deferred gains.
IUL also offers the safety of A-rated life insurance companies and the contractual guarantees of fixed universal life insurance, and it provides the upside potential of various markets (stocks, bonds, real estate and commodities). IUL also offers the potential for all gains to be tax free. What many investors are surprised to learn about IUL, is that it can be structured to be 100% liquid (with no surrender charges), the cost of the death benefit can be less than the cost of mutual funds, and the historical return for some of the indices (plural of index) has been higher than the underlying market indices—all with no market risk and no taxes. There is no perfect asset, but this may be the ultimate asset.
GIAs allow investors to “have their cake and eat it too”—market-linked returns without market risk. That is good news at a time many investors are only hearing bad news. Look at it this way: you insure your house, cars and other assets—maybe it’s time to insure some of your portfolio with guaranteed indexed accounts.
