In Case of a Bear Market: Do This
June 23, 2015 by Imeriti
The good news? The U.S. economy is in much better shape than it was a few years ago.
The bad news? Because we’re doing better, the Federal Reserve has signaled that it will hike interest rates soon, which could cause stocks to tank.
During the recession, the Fed kept rates low to help prop up our struggling economy. Those rates can’t stay low forever, though, and higher rates have traditionally led to lower stock prices.
Many investors and market experts worry that a rate hike could end the U.S. bull market of the last six years. The Bank for International Settlements, a bank for central banks, says the coming rate increase might have “significant” consequences.
If we’re indeed headed for a bear market, now might be a great time to introduce clients to indexed products, like indexed annuities and Indexed Universal Life (IUL), which can offer a certain amount of downside protection as well as potential for growth.
IUL, for example, offers life insurance protection, but a portion of the premium is also saved to a cash account. Those funds are credited with interest based on increases in an underlying equity index¹. If the underlying index falls then although no interest is credited, the premium and previous interest collected aren’t lost². And, if a rate hike somehow benefits the market and the underlying index increases, policy owners still benefit from the upswing¹.
Indexed annuities offer similar benefits. Funds paid into an indexed annuity are guaranteed against loss, even if the overall market drop causes an underlying index to decrease in value (credited with zero interest). However, the funds can be credited with interest based on the increased value of the underlying index.
¹The interest credited is limited by either placing a cap on the amount of interest that can be earned (“cap” rate) and/or requiring a specified rate that must be surpassed within the index before interest will be credited (“spread rate”).
²Guarantees are backed by the financial strength and claims paying ability of the issuing company.
For investors feeling jittery about upcoming market movements, then, indexed products might be the ideal solution.