Investment and insurance products come in different shapes and sizes. Along with that, comes common words and phrases used to describe them. Unfortunately, terms like safe, guaranteed, and flexible can not only mean different things to different investors but also to the advisors selling them and the companies they represent. That makes it important for investors to take the extra time and energy to peel back the layers of any product or services description and ask the right questions in order to be sure they are getting what they truly want.
Of all the investment terms out there, the big kahuna is the “G” word. Nothing has more persuasive power than a guarantee. On the surface, investors can assume something that is guaranteed is rock solid, air-tight with absolutely no risk. But that can be a costly assumption if you don’t peel back the layers and find out exactly what is being guaranteed and who’s offering it.
Often times, playing devil’s advocate and asking worst case scenario questions can help identify risks or potential holes in the promise. For example, asking what’s not being guaranteed or would have to happen for you to lose some or all of the money being invested. Furthermore, if a company is behind the guarantee ask for a credit rating to help ensure they are solvent and will be in business long enough to make good on their commitment. Most states do provide some form of protection if an investment or insurance company goes under, but it is usually limited to a specific dollar amount like $100,000.
Safe is a very comforting word. We all aspire to live in a safe neighborhood, send our kids to safe schools, and in many cases protect our hard earned savings with safe investments, right? While the term may be very reassuring it’s also a relative concept. Meaning it’s a term that is best understood as a comparison tool or in reference to something else.
Is it as safe as a U.S. Treasury bond or just safer than the stock market? Either way, make sure you have a specific point of reference to help decide how truly safe it really is and be mindful of safe sales pitches that include family members or an advisor’s personal situation. Just because they are invested in it or would put their grandmother in it, doesn’t make it safe.
Keeping your options open and having flexibility in what you do with your investments sounds like a dream come true. However, flexible investment products may not bend as easily as investors hope or need.
There are usually two sides to the flexibility equation that investors need to consider. First, they need to look at and understand what they can stretch in terms of dates, rates, and fees. Secondly, they need to be aware of what the company offering the product or service can twist or bend. It’s also important to point out that flexibility doesn’t necessarily correspond with the way life can unfold before or during retirement. Yes, an investor may have the option to make changes on an anniversary date or get access to a certain amount of money, but emergencies don’t follow a schedule and rarely cost less than expected.
That’s not to say investments that are purported to be safe, guaranteed, or flexible can’t meet an investor’s needs, rather it’s a warning not to be lulled into thinking it means one thing but turns out to be something very different.
Safe, guaranteed, and flexible investments can also come at a cost which in turn may affect overall performance, costs, and one’s ability to achieve their investment goals. Therefore, don’t assume common financial terms mean the same thing to everyone involved. Arm yourself with good questions, ask for any claims to be put in writing, and seek out the opinions of more than one professional to make sure what you hear is what you actually get.
This article was written by Robert Laura from Forbes and was legally licensed through the NewsCred publisher network.
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