Briefly, there are several ways. First, insurance companies are all about managing risk. This is what they do. They know how to manage their money so that they profit despite market lows. Insurance companies are known for their stability, and the best ones have high cash-claims ratios. One company we use has a 6-1 cash claims ratio! This means that this company has six times the amount needed to pay the claims of every single policyholder.
Insurance companies not only know how to manage risk, they also make a lot of money in premium payments. Over 90% of temporary (“term”) life insurance policies never pay a death benefit, because the policyholder outlives the life of the policy. And there are billions in unclaimed death benefits — money that could be paid out, but the policyholders’ beneficiaries don’t know to claim it. So insurance companies not only profit from funds management; they also profit from premium payments.
Another thing to consider is that insurance companies who offer protected accounts may also place a cap on your earnings. So if the market rises 30%, you don’t earn 30%; instead, you may earn “only” 15%. Not bad at all in today’s market! And not all accounts have caps – some have no earnings limit. And of the ones that do have caps, some have high caps, but many others do not. It is these low-cap accounts that detractors cry about on the Internet!
Essentially, the best insurance companies structure their account policies so that the client earns at or slightly above market potential while avoiding losses. They get to borrow your money, and in return, you get what the market is offering. It isn’t too good to be true: No one’s promising the moon. On the other hand, in the right accounts you get competitive or superior earnings, and what you earn, the company protects — you don’t lose what you’ve gained. The company makes money in down markets through conservative investments, premium payments, and unclaimed death benefits, so it can afford to let you keep what you’ve earned. These accounts aren’t magic bullets or miracle cures, but they do allow you to keep pace with the market while avoiding loss. We think that’s awesome.