Management Notes

Reference Notes for Management

S is close to retiring and would like to purchase a policy that will yield greater gains than bonds, but will still protect the principal with a minimum level or risk. Which product would S be advised to purchase?

S is close to retiring and would like to purchase a policy that will yield greater gains than bonds, but will still protect the principal with a minimum level or risk. Which product would S be advised to purchase?


  1. Equity Index insurance
  2. Endowment
  3. Graded whole life policy
  4. Return of premium policy

The Correct Answer Is:

a. Equity Index insurance

Correct Answer Explanation: a. Equity Index insurance

S would be advised to purchase Equity Index insurance as the correct option for a retirement investment strategy that seeks to balance gains with the protection of principal and minimizes risk.

Equity Index insurance is a type of permanent life insurance that offers a cash value component linked to the performance of a stock market index, such as the S&P 500. This product provides the potential for higher returns compared to traditional bonds while still safeguarding the principal investment.

Equity Index insurance operates on the premise that policyholders can participate in the upward movement of the stock market, but they are also protected from market downturns. The policy typically comes with a minimum guaranteed interest rate, ensuring that the cash value will not decline below a certain level, even if the market performs poorly.

This feature makes it an attractive option for individuals like S who are close to retiring and are looking for a balance between growth potential and capital preservation.

In addition to its potential for higher returns and principal protection, Equity Index insurance often comes with a unique feature known as a “floor,” ensuring that even in the event of a market downturn, the policyholder’s cash value will not fall below a specified minimum level.

This floor provides an added layer of security, particularly appealing to individuals like S who are approaching retirement and prioritize the safeguarding of their investment. The combination of participation in market gains, downside protection, and a minimum guaranteed interest rate makes

Equity Index insurance a well-rounded choice for those seeking a balance between growth and risk mitigation in their retirement portfolio.

Now, let’s delve into why the other options are not as suitable for S’s retirement objectives:

b. Endowment:

Endowment policies are life insurance contracts that pay out a lump sum after a specified term or upon the death of the insured. While they provide a guaranteed payout, the returns are often lower compared to equity-based products.

Endowment policies may not offer the same potential for growth as Equity Index insurance, making them less suitable for someone seeking higher gains.

c. Graded Whole Life Policy:

Graded whole life policies are a type of permanent life insurance with premiums that increase gradually over time. These policies offer a guaranteed death benefit and cash value growth.

However, the graded structure may not align with S’s goal of maximizing gains, as the cash value accumulation may be slower compared to the potential returns from Equity Index insurance.

d. Return of Premium Policy:

A return of premium policy is a type of term life insurance where the premiums paid are returned to the policyholder if they outlive the policy term. While it offers a return of premiums, it does not provide the same wealth-building potential as Equity Index insurance.

The returns are limited to the amount of premiums paid, and there is typically no opportunity for market-linked growth.

In conclusion, Equity Index insurance stands out as the most suitable option for S’s retirement investment strategy, offering the potential for higher gains than bonds while still protecting the principal with a minimum level of risk.

The other options either lack the potential for significant market-linked gains or do not align with the specific balance of growth and principal protection sought by someone close to retirement.

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