Don't invest in asset protection insurance

By Ginger Applegarth

Some things are better in theory than in reality. Asset protection insurance, which supposedly protects your investments if you die at a time when your investment portfolio has declined in value, falls into this category.

You know you have to take risks if you want long-term investment returns that exceed those of money market funds or bonds. In other words, you have to put your money in nonguaranteed investments such as individual stocks and mutual funds.

The problem is that many people get queasy watching the value of their portfolios expand and contract like an accordion. And in the recent downturn, that queasiness has turned to abject fear for many investors.

Playing off fears

Such a climate creates fertile ground for questionable products as salespeople play off that fear. When there is a perceived need for insurance, products to meet that need aren't far behind.

Enter asset protection insurance, which is nice in theory. It guarantees that if your investment account doesn't do well, your beneficiaries get will at least the amount of money you originally invested. The insurance company will even kick in funds equal to a small annual interest rate on your account, usually 5% a year.

Here's the reality:

• It's too expensive. The cost works out to about $30 to $50 per $10,000 insured in your portfolio. So if you want a policy to insure a $100,000 investment portfolio, you'll fork over $300 a year in insurance payments. That takes a serious bite out of your return.

• It's a low-risk game for the insurer. If you think about it, the chances of your losing your entire portfolio to bad investments are pretty small. If you had a $100,000 portfolio and it dropped 20% over the last two years, it's now worth $80,000. If you died tomorrow, your asset protection insurance would pay the $20,000 difference, plus a few extra thousand for interest. But despite market volatility, investments tend to increase in value over the long term. If you're planning to keep your investments for 10 years and you aren't a day trader or investing in options, you should be fine.

• It pays only the amount of money that you lost. Asset protection insurance pays only for the difference between your initial investment (or cost basis) and how much it has fallen in value.

• You can get a better deal purchasing term life insurance. Term insurance can accomplish essentially the same thing as asset protection insurance at a much lower premium rate. Let's go back to that imaginary $100,000 portfolio. You've determined that for your family to survive financially in case of your death, you need a $500,000 term policy for the next 20 years. (Use MSN Money's Life Insurance Needs Estimator for your own situation). If you increase the term policy to $600,000 to include your portfolio, you'll probably increase your yearly premium by $100 to $150. That's less than half of what it would cost to purchase the asset protection insurance.

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Adjust your portfolio instead

Only a few insurers offer this type of coverage. That may be because asset protection insurance seems designed for the benefit of the salesperson, not the customer.

It not only offers a quick commission, but may help entice an otherwise reluctant person to invest in stocks. Can't you just hear it now? "I have some terrific stocks and mutual funds that are just right for you, and I can really pick winners, but just in case they go down, I can get you an insurance policy against the loss to your heirs. It's a win-win situation."

Richard Babson, chairman and president of Babson United, a money-management firm in Watertown, Mass., calls asset protection insurance a "very interesting marketing technique." He says if people are nervous about investing in higher-risk stocks, "they need to readjust their portfolio, not buy insurance."

Updated Sept. 23, 2009