Accounting Today - July 2012

quently offered a cushion or elimi-
nation of losses.
Products
FROM PAGE 25

Structured products typically
have two components — a note
and a derivative — and a fixed
maturity. They are complicated in-
vestments intended for a “buy and
hold” strategy and offer protection
from downside risk in exchange for
foregoing some upside potential.
Principal protection may vary from
partial to 100 percent.

Investing in structured notes is not equivalent to investing directly in the underlying securities or index, and carries risks such as loss of principal and the possibility that

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you may own the referenced asset at a lower price, due to economic and market factors. At maturity, if the derivative turns out to be valuable, the investor can gain exposure to the upside of that index.

A clear difference between this and the annuity format is taxation. In a structured product, income often accretes to the owner’s tax return each year based on the income or phantom income produced by the structured product internal appreciation or growth.

Structured products are each individually registered securities, and each individual offering must have its own prospectus and be approved by regulators for offering. As a result, many sponsors of such products offer fairly short windows for you or your clients to decide and then act on making the investment. Once you understand the inner workings of structured products, the due diligence may become less time-consuming, enabling you to act more quickly.

On the insurance side, the new-est side of the business is the warp speed with which companies are entering and then exiting specific markets. On short to no notice, many carriers have pulled out of markets or decided to compete in what may feel like a crowded space. Long-term-care insurance appears to me most affected, with annuities a close second. But in terms of newer products gaining traction, hybrid life policies and LTC policies appear to be gaining momentum.

These types of policies require a large lump-sum deposit, frequently refundable at any time. In exchange for that deposit, the insurer will give you a permanent death benefit that drops over time, and long-term-care coverage comparable to a traditional LTC-only policy. While rates are so low, this type of product has great interest among fixed-income investors. As your deposit is fully refundable at any time, the real cost of the coverage is the opportunity cost on the deposit that will earn zero percent interest from the insurer. If the safe interest rate on cash was higher, this type of coverage might not be so popular. AT