Investment Insurance

There is a large discrepancy in information available about ‘Investment Insurance’ between accountants, with each individual policy differing greatly. Depending on the size, type, and method of investment in a stock or commodity, an individal accountant may choose to insure the client against many potential things; requisition, breach of contract, or even a war causing economic losses. Weather inbound or overseas investment insurance, on thing is always the same:

Investment insurance does not protect against depreciation.

It’s that simple really. There is no legal framework in place to insure an investor and guarantee a return on their investment. Insurance companies would be out of business if this happened, as there would be no risk to anyone except the insurers. This is not to say that a company can’t guarantee a return on an investment , just that insurance in a typical sense does not exist. For a small investment manager with a small client base, they may be able to legally guarantee a small return on an investment, but this is at the managers risk. These types of investments are always those with the lowest risks, and therefore the lowest overall return for the customer. Take care however, to discuss the impact of such an agreement; often a manager will do this to cap your overall return. As an example, if you have a guaranteed return of 1%/year for a small investment, and the options are maturing at 2%/year, then it’s likely that you will only receive the 1%, and your investment manager keeps the rest.

There are some simple concepts in accounting that may help you make a decision in weather to pay for investment insurance. Firstly, the bigger the risk, the bigger the gain. This is a simple way of saying that the smaller yield investments are much more likely to be ‘safe investments’ than the ‘big ticket’ options which may wildly increase or decrease. You may be able to get depreciation insurance for an extra price on a low yield investment, but it’s usually not worth it as the incremental gains are steady and stable. With larger investments and potential gains, no accountant will protect against depreciation; it could run them out of business in days.

The other main mantra for investment insurance is that of ‘does this affect my investment’. As investment insurance only protects against very specific circumstances, it does not affect many investments at all. Protection against breach of contract is the only aspect of insurance which affects every investor, but even this has tight legal frameworks to abide by; if a contract is breached then legal action is often better recourse than investment insurance. Similarly, investing in a UK only company as a UK consumer means that the currency exchange ban aspect of insurance is moot. It’s critical that you evaluate your need for insurance before purchasing, as many facets will simply not affect your investment if the worst did happen. As always, talk to an expert before making a decision on investment insurance.