Financial Advisors often get asked about Investment Opportunities outside of the mainstream. While these options are not typically offered as part of a Financial Plan, a professional financial advisor can provide insight and help evaluate the upside and the risk in these types of investment options.
There are numerous alternate, or unconventional, investment options. The three that have been raised recently by clients are Life Insurance, Mortgage Notes and Cryptocurrencies.
An investment in life insurance can make sense, especially when creating a means to protect beneficiaries from dipping into business assets after the death of a business owner. Asset classes such as mortgage notes and cryptocurrency can be attractive to investors seeking passive income. However, they can come with risks. Turning a non-performing note around can be a challenge and investing in cryptocurrencies requires considerable effort and acumen. With thorough due diligence and perspective from your professional financial advisor, you can assess the potential value of the investment and identify, and perhaps mitigate, some of the risk while evaluating yields.
Financial planners often will recommend that business owners or high net-worth individuals buy life insurance as a means to pay post-death expenses, such as inheritance taxes since death benefits are generally exempt from federal income tax. The devil is in the details, though. There are many kinds of life insurance, and it takes an expert to evaluate a policy–especially the fine print–to determine which type is right for an individual.
Term Life vs. Whole Life
Term life insurance is purchased for a set period of time. This type of policy has the lowest premiums and there is no guaranteed payout. If the insured passes away during the term, a predetermined sum is paid to the beneficiary. However, if the individual is living at the end of the term, the policy expires and in most circumstances, becomes worthless.
Whole life insurance covers an individual for life and has guaranteed value upon the death of the insured. The premiums for whole life policies are higher, but they feature a savings component that builds cash value in addition to the death benefit as premiums are paid over time. In some circumstances, that cash value can be borrowed against or used to increase the death benefit. It can also be paid out if the policy is canceled, though the amount depends on several factors including associated fees. This is known as the cash surrender value.
If whole life insurance is no longer needed (or the party can no longer afford to keep up the payments), the policy can be sold outright on the secondary market. This can be a useful option to keep some of the cash value of a policy that has been paid into for some time. In this scenario, the purchasing company continues to make the premium payments until the original owner dies. When death occurs, the company collects the benefit from the insurer.
If you already have a Life Insurance policy, it’s important to have a professional review the policy to ensure that it will provide for the purchase intent.
A performing mortgage note is one that is paid monthly, on time, by the borrower, whereas a non-performing note is one that is in default. Lenders sell off non-performing notes, usually at a discount.
This asset class could be an option for those interested in adding real estate to their portfolio but not interested in managing a property. Depending on the investor’s goals and resources, mortgage notes can offer the potential to build a high-yield portfolio and create passive income.
Notes can be purchased in whole or in part, as a one-off or in volume through a fund. Again, thorough due diligence is paramount to vet the quality of the note and the history of the borrower or the success of the investment fund. Learning to recognize the deals that have the most potential is key.
Investing in mortgage notes can have a lower risk because the notes are backed by a hard asset: the property. With a performing note, as long as the borrower makes timely payments, the investor can collect money and earn interest. If the note stops performing, the investor has several exit strategies. The loan can be restructured to try to keep the borrower in the house (and thus get the note performing again), or the asset can be taken back and rented out or sold.
Cryptocurrency reached a fevered pitch in mid-2018 only to plummet by year end. Yet, despite the volatility, this digital currency continues to be an attractive means to exchange funds. For investors with high risk tolerance, cryptocurrency can be appealing. Investing in cryptocurrency is highly risky and volatile. When choosing which coins to invest in, it’s critical to do the proper research, and only invest money you can afford to lose. Thorough due diligence is crucial to finding the right coins for the investment risk.
Cryptocurrency is not cash in your pocket. Rather, it’s a concept that could offer a substantial future payday. Patience and holding are key. This should be a long-term investment strategy with the ultimate goal of building value over time.
While Bitcoin is the most well-known, there are thousands of coins on the market today. A portfolio can be diversified by adding coins, which can be placed in several industries and spread across large, medium and low market caps. Investors can participate around the clock, and because currencies are peer-to-peer, there is no middle man involved.
Cryptocurrencies are still difficult to spend on day-to-day activities, but be aware that spending transactions, once confirmed, are irreversible. Passwords are unique to the transaction and cannot be replicated, and if lost, cannot be retrieved. While this makes cryptocurrency incredibly secure in some ways, it also means the investment could become inaccessible. This Fortune magazine article demonstrates the risks. http://fortune.com/2019/02/04/cryptocurrency-quadrigacx-gerald-cotten-frozen-funds/
The nascence of this type of investing leaves open many possibilities for nefarious activities. Learn to recognize the red flags for cryptocurrency scams. Pushy sales copy on websites, promises of big returns, projects that have another person mining coins for you are a few.
Be sure to understand the background and experience of the team behind the coins you are interested in. Look at projects with profiles on each team member and find out whether they are veterans in the field, which is widely viewed as positive.
Unconventional investment opportunities can deliver results. However, this approach is not be right for every investor. Talk to your professional financial advisor before making big decisions and protect your assets by taking the time to do the research and asking for advice.
NOTE: Investing in alternative investments is speculative, not suitable for all clients, and generally intended for experienced and sophisticated investors who are willing and able to bear the high economic risks of the investment. Investors should obtain and carefully read the related offering memorandum, which will contain the information needed to help evaluate the potential investment and provide important disclosures regarding risks, fees and expenses. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information.
Also, it is important to note that LifeSteps Financial and its advisors are not licensed insurance agents or licensed mortgage brokers.