When exploring different financial planning tools, you’ve no doubt come across both life insurance and mutual funds. But what’s the difference between the two? Life insurance and mutual funds each offer different benefits and serve distinct purposes when it comes to financial planning. While life insurance provides financial protection for loved ones in the event of your death, mutual funds offer an opportunity to invest in a diversified portfolio of stocks, bonds, and other financial assets that can be traded and hold value (called securities).
Understanding the difference between these two financial instruments can help you make informed decisions about long-term financial security and investment goals. In this article, we’ll discuss the fundamental differences between life insurance and mutual funds so you can feel more empowered in your financial planning choices.
What is life insurance?
On paper, life insurance is simply a contract between you and a life insurance carrier that ensures financial coverage for your beneficiaries if you pass away. However, it’s much more than that—it’s an important means of safeguarding your loved ones' financial future and well-being. There are several different types of life insurance coverage, each offering unique benefits. These include:
Term Life Insurance: Term life insurance is a type of life insurance that provides coverage for a specific period, such as 10, 20, or 30 years. It’s a flexible and affordable coverage option that can be easily tailored to specific financial goals or life phases, like putting children through school or paying off a mortgage.
Whole Life Insurance: Whole life insurance is a type of permanent life insurance, meaning it provides coverage for your entire lifetime as long as the premiums are paid. This type of policy also accumulates cash value over time, which can be accessed through policy loans or withdrawals. The premiums for whole life insurance are typically higher than those for term life insurance, but they remain level throughout the policyholder's life.
Universal Life Insurance: Universal life insurance is a flexible type of permanent life insurance. It allows policyholders to adjust their premium payments and death benefits over time, providing greater flexibility than traditional whole life insurance. The policy's cash value grows at a variable interest rate, and policyholders can use this cash value to pay premiums or increase the death benefit.
What are mutual funds?
Mutual funds are investment vehicles that pool money from multiple investors to purchase a variety of stocks, bonds, and other securities. They are professionally managed by fund managers who make investment decisions on behalf of the investors. Mutual funds offer a way for individual investors to access a diverse range of investment opportunities, even with relatively small amounts of money. Mutual funds come in various types:
Equity Funds: Equity funds invest primarily in stocks, providing the potential for long-term capital growth.
Money Market Funds: Money market funds typically invest in short-term, high-quality, low-risk securities and aim to provide stability and liquidity.
Bond Funds: Bond funds invest in fixed-income securities, offering income through interest payments.
Balanced Funds: Balanced funds invest in a mix of stocks and bonds, offering both growth and income potential.
One key advantage of mutual funds is diversification. By investing in a mutual fund, you gain exposure to a broad range of securities, which helps spread risk and reduce the impact of individual security price fluctuations. This diversification can help mitigate the impact of market volatility on your portfolio.
Can you have life insurance and mutual funds?
These financial tools aren’t mutually exclusive, so you can choose to take advantage of both life insurance coverage and mutual funds. Some life insurance policies, such as whole life insurance and universal life insurance, come with a cash value savings component that can be used as a financial asset, similar to an Individual Retirement Account (IRA), which is a tax-advantaged investment account designed to help individuals save and invest for retirement. Regardless of whether you invest in mutual funds, life insurance is a key financial tool that ensures your loved ones are protected and secure in the event of your death. It can help provide coverage for both large and small financial obligations, from mortgage payments to college tuition to day-to-day household expenses, making sure those who matter most to you won’t be left struggling financially due to the loss of your income.
Secure Your Financial Future with SelectQuote
Whether you’re looking for a smart investment tool or you want to secure your loved ones’ financial future, finding the right life insurance policy is crucial. Fortunately, with nearly 40 years of industry experience, SelectQuote is here to help. Our licensed insurance agents will take the time to learn about your financial goals and help you compare unbiased rates from several of the nation’s highly trusted carriers—all in one place. They’ll help you save time and money so you can make the right decision for your future.
