Are insurance companies and pension funds considered financial instruments?

Insurance companies and pension funds are not really financial instruments as a whole. However, the components of their activities can and may be worth closer examination for further investigation into financial instruments.

Key points to remember

  • Overall, insurance companies and pension funds are generally not considered financial instruments.
  • Insurance companies offer insurance policies and annuities, which can be financial instruments.
  • Pension funds use a variety of different financial instruments to invest in different asset allocations.

Financial instruments

First of all, it can be useful to understand what a financial instrument really is. Financial instruments are generally negotiable securities. Thus, a financial instrument and a security can be synonymous. Legal jurisdictions may have varying coding for a financial instrument, which may be important to registrants.

Financial instruments have various characteristics. Exchangeability is generally essential. Financial instruments generally represent a certain amount of ownership. They are usually based on a contract between two parties. They also usually have a fixed book value.

Financial instruments are generally tools that fund managers use when looking for different types of allocations. The most basic financial instruments are:

  • Shares
  • treasury bonds
  • Municipal bonds
  • Corporate bonds

Financial instruments can also be more complex, for example in the form of derivatives or structured products. More complex financial instruments may include:

Insurance companies

Although insurance companies themselves are not necessarily financial instruments (unless you consider their stocks or debts tradable on the secondary market), they produce two different types of alternative financial instruments. Insurance companies are known to provide insurance policies. Another of their products may also include annuities. Insurance policies and annuities can potentially be considered types of alternative financial instruments.

Insurance conditions

Traditional and online insurance offers are becoming broader and easier to obtain. Online technologies are expanding the way policyholders purchase and obtain policies, as well as receive payments. This concerns both individuals and commercial policies. For individuals, some of the major categories of insurance include medical, dental, vision, auto, home, life, short-term disability, and long-term disability. Businesses also purchase policies in these categories and can also obtain coverage for real estate, workers’ compensation, and more.

Insurance, in its simplest form, is written protection against uncertain risks. Policyholders pay a specified premium for the promise of payment if a claim is filed and approved.

Overall, there is no secondary public market for insurance policies. However, they have many characteristics of a financial instrument. Insurance policy liabilities may also be conditioned and/or covered by reinsurance companies, similar to the structuring of standard securitized products.

For the policyholder, an insurance policy is a contract with the insurance company. It implies ownership. Insurance policies also have a fixed value. So, although most insurance policies are not securities per se, they can potentially be considered another type of financial instrument.


Insurance companies also administer annuities. Annuities are a more traditional type of financial instrument but can still be considered an alternative investment. Most variable annuities and indexed annuities must be registered as security with the Securities and Exchange Commission (SEC). Fixed annuities are generally also considered financial instruments, although they are not required to register.

An annuity requires an investor to make either a lump sum or a systematic investment over time. The annuity manager then promises to pay the investor a payout based on the terms of the annuity. Insurance companies are best known for offering and administering annuities, but some financial institutions also offer them.

pension funds

Holistically, a pension fund could be considered alongside mutual funds, exchange-traded funds (ETFs), and even hedge fund portfolios. Pension funds are a pooled collection of managed assets with an organized asset allocation that seeks to earn a return over time that is used to meet pension payment obligations. Pension funds are losing popularity due to the complexity of their management. However, many public employers still use pension plans.

A pension fund manager uses a variety of financial instruments to achieve the fund’s objectives. Like mutual funds, ETFs and hedge funds, pension funds invest in stocks, bonds and possibly structured products.

Pension fund managers have a liability matching responsibility which increases the complexity of their work. Pension funds undertake to pay a fixed amount to their retired employees. This may lead to the use of securities of more conservative financial instruments for the funds needed to meet immediate obligations. Pension funds also invest in higher risk financial instruments with higher expected returns, such as stocks, to accumulate more capital for their future obligations. Overall, a pension fund manager has the power to invest in all types of financial instruments in order to achieve their objectives. However, managers may be bound by certain standardized investment policy constraints established by the fund itself.