2020 was a volatile year for investment portfolios – and for life in general. While we hope the worst is behind us, we know that market volatility is nothing new. Remember the Y2K tech bubble, the sub-prime crisis of 2007/2008 and the Chinese stock market turbulence in 2015/2016? Each of these events saw index declines as great or greater than what we experienced in Q1 2020 as a result of the Covid-19 pandemic. This sort of market volatility can be extraordinarily distressing for your investor clients, particularly those in or nearing retirement.
Segregated (seg) funds, an investment product (invested in one or more underlying assets,such as mutual funds or ETFs) combined with an insurance contract, can be appropriate for investor clients who are concerned about volatility, market corrections or long-term bear markets, but don’t want to forsake the possibility of higher returns. By offering guarantees of all or a portion of the principal, seg funds protect invested capital while providing upside exposure. If, during the life of a seg fund contract, the value of the underlying assets grow, your client, or in the case of death their beneficiary, will reap the gain. However, if upon maturity, or the death of the contract holder, the market has fallen, losses can be capped or wholly eliminated. And 100% death benefit guarantees are available to your client investors up to the age of 90 (without medical review requirements). It’s no surprise that seg funds experienced increased popularity in 2020.
Another way seg funds can help your investor clients address market volatility is the availability of “resets”. Reset options give your clients the ability to lock-in value gains of the underlying asset. By implementing a reset when prices peak, the guaranteed amount of the seg fund will be increased to match the elevated market value. This feature allows your investor clients to take advantage of upside gains (under the terms of the reset feature) even when asset values subsequently decline during the lifetime of the seg fund contract.
The current environment – and the prospect of massive government aid programs coming to their eventual end – has driven fears of a major market correction to the highest level in many years. Segregated funds’ protective features are well suited to addressing the emotional impact of investing in uncertain times. Although stock markets will always have periods of uncertainty and heightened risk, segregated funds can combine performance with security to help give your investor clients the peace of mind they need and deserve.