On the Crossroads – Similarity and Differences of Mutual Funds and VUL

At this point, we already know everything we need to know about mutual funds – what it is, the types of mutual funds, how to start investing, and the strategies we can implement to make it work in our favour.

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Now, let us discuss another instrument that is very similar to Mutual Funds, but is coupled with protection to ensure that whatever happens, your financial goals will be reached.

Understanding VUL

As defined by investopedia, a Variable Universal Life Insurance, popularly known as VUL is

“A form of cash-value life insurance that offers both a death benefit and an investment feature. The premium amount for variable universal life insurance (VUL) is flexible and may be changed by the consumer as needed, though these changes can result in a change in the coverage amount. The investment feature usually includes “sub-accounts,” which function very similar to mutual funds and can provide exposure to stocks and bonds. This exposure offers the possibility of an increased rate of return over a normal universal life or permanent insurance policy.”

Alright! Now, let’s discuss it on a very very simple way.

On the simplest sense, a VUL is one part insurance, and one part investment. While most investors would shy away when insurance is raised in the discussion, others find this option a great way to secure a financial goal, like ensuring that their children have enough funds even when the unfortunate happens.

Similarities of Mutual Funds and VULs

The investment portion of a VUL is technically a mutual fund. Thus, when investing in VULs, you’ll be given the opportunity to choose whether what type of funds (equity, bond, and balanced) the investment portion of your premium will be invested in.

In most VUL products, you can add as much additional investments that you can to increase your funds’ portfolio, subject to minimum amounts employed by the respective VUL providers.

Just like mutual funds wherein anytime that an investor may be needing the funds, these are available for withdrawal (or redemption).

Differences of Mutual Funds and VULs

Well, the only difference of mutual funds and the investment portion of VULs is what you are purchasing when you are investing in it. In mutual funds, when you make an investment, you purchase shares of stocks. In VULs, when you make an investment, you purchase “units” of a trust fund. Yes, the investment portion of VULs are basically UITFs (Unit Investment Trust Fund).

Basically, this shows the structural differences of these two types of investment.

On the obvious note, the major difference of the two is the insurance part of the VUL. A mutual fund has none.

Now, the question will always be, what is the best investment to put your money in?

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  • Ritchie

    Hi Nick… In my case I am paying my VUL good for 5 years & the other 10 years. Right now I am in my second year paying the amortization. Should I convert the other one (10 years) into another paper assets?

    • http://mutualfundphilippines.com/ Nick Raquel

      Hi Ritchie,

      It really depends on many things. If you haven’t meet yet your ideal insurance cover yet, I suggest you keep it. Besides, since it’s a VUL, your practically invested in all sorts of paper assets since the investment portion is very similar to a Mutual Fund.

      I suggest though that you talk to your advisor and ask for an assessment.

  • YUan

    hi, Nick, which is better then? if you have an insurance already and you also invest in stocks/mutual funds, is it ok to explore VUL?

    • http://mutualfundphilippines.com/ Nick Raquel

      Hi Sir Yuan,

      Well, “better” is a relative term. If an investor is fully insured, then contracting a VUL policy is redundant and unnecessary. However, if not, it is worth considering for convenience and flexibility.

      One way to know if your fully insured is by dividing your Annual Personal/household expense over an assumed average annual rate of return.

      Say your personal annual expense is 300,000.00 and there are existing investment instruments wherein you’ll constantly earn 10%. This means that you should be covered by at least 3M (300k/10%)

      The logic here is that if the unexpected happens, the family will be receiving the 3M which they can invest in investments with 10% average annual return. This further means that, though the insured is gone, the family left behind will continue to receive the income every year (300k) coming from the returns of the invested insurance claim (3M).