Insurance is an important part of your investment portfolio. Home, car, disability, and life insurance all play essential roles in your financial well-being. But have you considered insuring part of your investment portfolio itself?
Is the insurance quality any good?
Though some institutions back their investments with some sort of guaranteed component, investors must study whether the insurer itself is stable enough to actually cover any losses. Generally, any organization that claims to guarantee your principal against any loss should be scrutinized carefully
In America many conservative investors feel comfortable knowing that the FDIC, which is backed by the Federal government, will bail out a failing bank and will guarantee bank deposits. No depositor has lost even a penny of FDIC-insured funds as a result of a bank failure. However, there are limits to the coverage. For most bank deposits, the FDIC will insure up to $100,000 per depositor per bank. So if you have a certificate of deposit in a bank for $120,000, and the bank goes bust, your first $100K would be completely insured, and the other $20,000 would not be, though you might still get back some or all of it depending on what happens. However, if you’ve got a joint account, then the whole $120K would be protected, because each co-owner would be entitled to $100K of insurance. Under new policies from the FDIC, certain retirement accounts (including IRAs) have even greater protection – $250,000
Know what’s not protected
Though deposits in banks are eligible for FDIC insurance, investments are not. That means that if you buy stocks, bonds, mutual funds, life insurance policies, annuities, etc. from an American (or Israeli) bank, there is no FDIC coverage. So don’t feel that having bought your portfolio at your bank gives you any special protection. It doesn’t. It is important to note that currently, there is no Israeli equivalent of FDIC insurance on bank deposits.
Easy ways to buy CDs
If you like the idea of having FDIC-insured certificates of deposit in your account, speak to your investment advisor. This is because you don’t need to go to a bank to buy a CD; they can be bought in investment account in the same manner that you buy stocks and bonds. Many people put a piece of their portfolio in more aggressive investments, and then balance it off with CDs. Since all of their investments are in one account, tracking their finances becomes very easy.
Moreover, brokers have easy access to bank CDs from many different issuers, so they can shop around and get good terms on the offerings. There are many types of CDs available, including inflation-linked CDs, step-up CDs which have increasing coupons, monthly-pay CDs, long-term callable CDs with rates higher than shorter-term ones, and more. Your advisor can explain the added benefits and risks to the different CD structures. But having FDIC insurance certainly adds an important safety component to these investments.
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Zack Miller helps clients make sense of their investments. A former equity analyst for a leading multinational hedge fund, Zack writes about issues pertaining to investors investing internationally . For more information, call 1-888-327-6179, or email zack@profile-financial.com
