What Stock and Bond Alternatives Do I Have?

Most prudent investors have at least some of their holdings in stocks, corporate bonds, or both. In fact, when most people think of “investing,” they think of Wall Street and the stock markets.

Many fail to realize that there are a number of ways to invest in stocks besides owning individual shares.

Mutual Funds

A mutual fund is a collection of stocks, bonds, or other securities. Investors purchase shares of the mutual fund that is managed by a professional investment company.

A typical mutual fund holds dozens of different securities. That offers some measure of diversification — a sharp decline in an individual security won’t be nearly as damaging to your portfolio as it would be if you only owned a few securities.

Mutual funds are professionally managed. Some of the finest managers on Wall Street devote their attention to buying and selling securities according to the goals of their funds.

And mutual funds often have a minimum investment of only $1,000 — some will accept even less.

The value of mutual fund shares may fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Bond funds are subject to the interest-rate, inflation, and credit risks associated with the underlying bonds in the fund. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund's performance.

Variable Universal Life Insurance

The insurance companies have developed some innovative products that enable you to invest in a wide range of securities — including stocks — through your life insurance policy.

A variable universal life (VUL) insurance policy operates much the same as a “traditional” universal life policy. In exchange for premiums, the insurance company provides a death benefit. And, just like more traditional life insurance policies, the cash value within the policy accumulates tax deferred.

But here is the unique difference: you decide how the premium is divided among the subaccounts. With most policies you can select from several different investment subaccounts.

These investment options allow you to participate in the market and experience the gains and losses realized by the underlying securities.

The cash value of a VUL policy is not guaranteed. The investment return and principal value of the variable subaccounts will fluctuate. Your cash value, and perhaps the death benefit, will be determined by the performance of the chosen subaccounts. Withdrawals may be subject to surrender charges and are taxable if you withdraw more than your basis in the policy. Policy loans or withdrawals will reduce the policy’s cash value and death benefit, and may require additional premium payments to keep the policy in force. There may also be additional fees and charges associated with a VUL policy.

Variable Annuities

The insurance companies have developed another interesting product: the variable annuity.

With a variable annuity, you invest a sum with an insurance company, just as you would with a fixed annuity.

But instead of investing your money in its general account, as with a fixed annuity, the insurance company invests it in a separate account. Like a variable universal life insurance policy, this separate account is made up of a number of different investment subaccounts. You specify how much of your annuity will be invested in the various subaccounts.

Your return will be based on the performance of the investments you select.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, administrative fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Withdrawals of annuity earnings are taxed as ordinary income and may be subject to surrender charges plus a 10 percent federal income tax penalty if made prior to age 59½. Any guarantees are contingent on the claims-paying ability of the issuing company. Variable annuity and variable universal life subaccounts fluctuate with changes in market conditions, and when surrendered, your principal may be worth more or less than the original amount invested. 

Mutual funds, variable annuities, and variable universal life insurance are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.