I recently learned of indexed universal life insurance. One of the features of this type of investment is that a portion of the funds are used for puts, so the investment rarely (never?) loses money from market fluctuations.

AFAIK, the tradeoff for this is that there is a cap on the other end, so the investment won't take advantage of a spike which is greater than 10% or 12%. There's a few other gotchas as well. But this is not my question.

My question is, are there other investment types that take advantage of this sort of "rainy day" structure, where a portion is used for puts (or something else?) that ensures little or no loss due to market fluctuation?


An index annuity is almost the same as Indexed Universal Life, except the equity-index annuity is an investment with a guaranteed minimum return, with sometimes a higher return that is a function of the gain in the stock market, but is not associated with a life insurance policy. After a time, you can convert the EIA to a lifetime income (the annuity part) or just cash it out. They often are very complicated, but are constructed by combining bonds with index options (puts) just like indexed universal life.

Unfortunately these tend to have high fees and/or commissions, and high (early) surrender charges, which can make them a poor investment. Of course you could just "roll your own" by buying bonds and puts FINRAS bulletin on EIAs, pdf warning.

Here's a description of one of these securities: pdf.


Many mutual funds include such mechanisms. However, the higher fees for those funds (when compared to simple index funds) may cancel out any improvement the hedging strategy offers.


I learned about Structured Index Annuities earlier this year. I posted a Question about this shortly thereafter. Here are two companies that offer such products as well as mu original post:



Index Annuities and synthetic duplication with options

As I explored these, I found out that if I set up the synthetic equivalent with options and if I chose a cap similar to what the indexed annuity offered, I could obtain about 75% more downside protection. For example, if the SIA chosen offers a 7% annual cap on the S&P 500 with protection against the first 10% of drop (no loss), if I structured it to achieve a maximum of 7% potential return then I would have about 18% of downside protection rather than 10% (the numbers vary based on the implied volatility of the options). The difference is due to the 'gotcha' fee of issuer.

In addition, I could shut my position down at any time whereas the SIA is a commitment for 5 to 6 years in one year segments.

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