Should You Insure Your Mutual Funds?

If you crave guaranteed investment returns, insuring your mutual funds might make sense, but such insurance - particularly for the younger investor - deserves close scrutiny before you buy.


Products such as American Skandia's AS Goodwill coverage, SunAmerica's Asset Protection Plan, and Prudential Insurance Co.'s PruTector are basic group term life policies that you can buy in conjunction with a mutual fund from one of the companies (Prudential also offers the PruTector in conjunction with IRA accounts).

The policies pay out only after you die, and only if your mutual fund has lost money since the time when you purchased the coverage.

Here's how it works: For a premium that ranges from 0.1 percent of your investment up to 0.5 percent, the company guarantees that the money in your mutual fund, plus an annual gain of 4 or 5 percent (up to a limit, usually capping returns at 200 percent), will always be there for your heirs. On the other hand, if the market dips, the insurance guarantees that your initial investment will be increased by 4 or 5 percent. Then the company will calculate your life insurance benefit from that adjusted-investment figure.


Upon your death, your beneficiary will get the difference between the market value of your investment and the amount guaranteed by your life insurance. So, theoretically, if you bought a $25,000 protection policy, it is extremely unlikely that the company would end up paying $25,000, even though your premium was calculated based on that coverage amount.


With the stock market sustaining an annualized 11 percent return since the Depression ended, most consumers aren't interested in paying for mutual fund protection, regardless of how cheap it is. The coverage can range from $100 to $500 per year on a $100,000 investment. Over the long term, even the most conservative investor's portfolio can grow substantially. It's no surprise that sales of mutual fund insurance have not ridden the coattails of the mutual fund investment fervor.


Prudential says it has had the most success selling mutual fund insurance in specific markets, including to investors older than 55. The company does not disclose specific sales figures.

What's it good for?

Who should consider mutual fund insurance? An older investor who wants to take some risk in the market to grow his or her investment faster but who can't stomach the thought of losses. The cost of mutual fund protection varies according to your age at Prudential, while SunAmerica and American Skandia charge 0.3 percent of your investment plus another $25.