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Ask Geri: I Want to Get VUL and Mutual Funds. Is it OK?(3-min read)

Hi Sir Geri,

I’m planning to invest in VUL. But still, I also want to invest in mutual funds simultaneously. Is it ok to do this simultaneously? Which has higher return? I’m trying to weigh how much to allocate for both given my limited budget.

– Ninia of Mapua, via Facebook page

 

cross_roads by PRMF, on Flickr


Congratulations

First let me congratulate you for having the investment mindset. You’re now many steps closer to the lifelong goal of financial freedom.

VUL or Mutual Funds?

I assume you already know that VUL also has a component similar to mutual funds (MF) — an investment portion on top of protection benefits, given that you’ve already talked to an insurance agent. Now is it ok to have both simultaneously?
If your budget permits, why not!?!
 
I suggest you put an objective for each investment. Your VUL will be for what? Aside from the coverage, will it be your retirement fund? The mutual funds will be for what? Tuition of future kids? Future house and lot?
That way, you also know how long you will hold the investments, and what type of fund you will choose for both based on your OHA (Objective-Horizon-Appetite).
 
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Which Has Higher Returns?

Returns depends on the funds you will choose for your VUL and MF. If you choose an equity fund, it will be higher risk but higher long turn returns. If a fund focused on bonds, lesser risk but lesser returns. If balanced fund, somewhere in between. Note that the investment portion of VUL, and your MF are not guaranteed, so returns will vary. It may even lead to losses in a bearish market.
 
Returns also depend on the performance of the fund managers handling the VUL and MF. We can’t really compare the returns of a VUL and MF as they are not apples to apples.
 
One big difference though is that for MF, what you put in will be purely market investments. With VUL, since it has death benefit and sickness protection, for the first 3 years or so, only a small portion of your premium goes to market investments since the VUL prioritizes the guaranteed benefits — sum assured, sickness benefit etc. For year 4 onwards, a bigger portion of your monthly premium goes to investments. Having said this, your investment in MF is sort of faster since it’s already 100% in the market, while for VUL, you need to wait around 3 years to have significant investment portion. But as for actual returns, we cannot tell.
 

Diversify

It is ideal that you have both VUL and MF, hopefully different fund types so you are diversified.

Actually if you plan to get more funds in the future, it’s ok to get equity for both especially if you have long term objectives anyway and your age allows for it. Issue with getting equity for both is that if the market goes south (like nowadays), both investments in VUL and MF will go south. If you are diversified, if one goes down, the other may not be down.

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Cover Your A$$ First

If you don’t have insurance yet get, prioritize VUL so you and your dependents are protected, then eventually you also get investments through it. As for the amount you’ll put in, think how much death benefit your dependents will need to survive for 1 to 2 years in case you die. Then check whether you can afford the premium for that. If you have remaining budget for mutual funds, go for it too.

Hope this helps. Goodluck on your investments.

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Photo: “cross_roads” (CC BY 2.0) by  PRMF 

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