Q:

How do insurance funds work?

On my wife's 403(b) (like a 401(k)), she has an option to invest in a couple insurance funds.  How do these work? Some seem to be low-risk, while others are moderate-risk.  I'm just not quite sure how insurance policies are something that could be invested in. 

A:

Sometimes 403b's contain annuities or other insurance related instruments. 
I know that in many New York schools the local teacher unions administer the 403b plan, and sometimes choose proprietary investments like variable annuities or other insurance products. In New York the Attorney General sued and settled with the state teacher's union for their endorsement of a high cost ING 403b plan -- I believe the maintenance fees were in excess of 3%/year! 
In a tax deferred plan like a 401k, 403b or 457 plan, the low risk "insurance fund" is generally a GIC "Guaranteed Investment Contract". A GIC (aka "Stable Value Fund") is sort of cross between a CD and a Money Market fund. It's used by insurance companies to raise short term capital. GICs usually yield a premium versus a money market and are a safe investment.
If your wife is in a 403b with annuities or other life-insurance tie ins other than GICs, make sure that you understand the fee structure and ask lots of questions. 

