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, which is managed by a professional investment company.

A typical mutual fund holds many 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 individual 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.

Mutual funds often have a minimum investment of only $1,000 — some will accept even less. The value of mutual funds 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 indirectly 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.*

A variable annuity is a contract that provides fluctuating (variable) rather than fixed returns. The key feature of a variable annuity is that you can control how your premiums are invested by the insurance company.  Thus, you decide how much risk you want to take; however, you also bear the investment risk.

Most variable annuity contracts offer a variety of professionally managed portfolios called "subaccounts" that invest in stocks, bonds, and money market instruments, as well as balanced investments.  Some of your contributions can be placed in an account that offers a fixed rate of return.  Your premiums will be allocated among the subaccounts that you select.

Unlike a fixed annuity, which pays a fixed rate of return, the value of a variable annuity contract is based on the performance of the investment subaccounts that you select.  These subaccounts will fluctuate in value and the principal may be worth more or less than the original cost when redeemed. 

When you decide to receive income from your annuity, you can choose a lump sum, a fixed payout, or a variable payout.  The earnings portion of the annuity will be subject to ordinary income taxes when you begin receiving income.

Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59^1/2.  Surrender charges may also apply during the contract's early years.  Variable annuity subaccounts fluctuate with changes in market conditions, and when surrendered, the principal may be worth more or less than the original amount invested.

As with most financial decisions, there are associated expenses.  Be sure you understand and compare them prior to investing.

The three stock and bond alternatives discussed, mutual funds, variable life insurance, and non-qualified variable annuities, are all sold by prospectus.

*Annuities are long-term financial products designed for retirement purposes.  Variable investment options within variable annuities are subject to fluctuation in value and market risk, including the possibility of loss of principal.  In addition, annuity policies have limitations and a charge for withdrawals in the policy's early years.  For costs and complete details, contact your AXA Advisors financial professional.

Variable life insurance, variable annuities, and mutual funds are offered by prospectus only.  The prospectus contains more complete information including objectives, risks, charges, and expenses.  Please obtain the prospectus from your financial professional and read it carefully before purchasing a product.

GE 47226 (12/08)