Determining Your Risk Tolerance for Investments

When you’re ready to invest, you’ll likely consider the amount you have available to invest and what you want your financial gain to be over a specific period. You may be quite specific about these factors, or maybe you care only about the bottom line and how much you stand to lose or gain.

For your own peace of mind, it’s wise to determine your level of risk tolerance for your investments. Understanding your own wants and desires related to your finances will largely determine how you decide to allocate your funds.

Consider your answers to the following questions to help you determine your level of risk tolerance regarding investments:

1. How much are you willing to risk? Based on how much money you currently have, how much of it are you willing to risk in an investment?

* Of course, some people will say, “no problem, let’s go for it” regardless of how much they’re worth. Others, however, will carefully evaluate their financial worth and be willing to risk only a certain percentage of their overall wealth.

2. Are you okay with no cash flow? Can you handle no investment cash coming in for a while if a large investment goes south?

* If so, how long can you put up with this condition? Being able to live with no money coming in is difficult for most people. How well you can accept this situation is an important determinant of your risk tolerance.

3. Is an investment “doable” in your eyes? If you’re considering a specific investment, do you feel the investment is one you could make without hesitation?

* Each person has his own thoughts and ideas about the type of investments in which he has confidence. Your investment risk tolerance depends on the rigor with which you evaluate your potential investments.

4. What is your experience in investing? Are you able to adjust to money losses in the short term to gain funds over the longer term?

* If you’re 40 years old and you’ve been investing for 20 years, you’ve got 2 decades of experience under your belt. You can most likely trust in your prior investment experience when it comes to making investment decisions. Plus, 20 years of investing builds a lot of confidence, which strengthens your risk tolerance.

* But what if you’re 35 years old and making your first investment? If this description is closer to your situation, your risk tolerance will be lower and for good reason.

5. How old are you and how much are you worth? These factors are also important when it comes to making difficult decisions about how to invest your money.

* When you’re younger, you may have more tolerance for loss because you have more time to make up any losses before you retire.

* Also, at any age, the higher your net worth, the easier it may be to tolerate a loss of a small percentage of your worth.

It’s wise to know your level of investment risk tolerance. Because making investments are so integral to you and your family’s financial future, it’s important you be intimately connected with your feelings and ideas about investing your money and the risks involved.

If you seriously ponder the above questions and your responses, you’ll be able to determine successfully your risk tolerance for investing.

Choosing Investments Within Your Variable Universal Life Insurance Policy

A variable universal life insurance policy, known in the insurance industry as a “VUL,” has many benefits. A VUL offers permanent life insurance and allows you the option to invest your cash value funds as you see fit within the policy.

Apportionment of Your Money When You Purchase a VUL

Unlike a term life insurance policy, a VUL builds cash value. This cash value accrues because a part of your insurance premium is applied to pay for the life insurance portion of the policy while the rest of your premium is placed in a separate account where it can earn more dollars for you.

Restrictions on managing the cash account for your variable life insurance policy are many as the Security Exchange Commission, the SEC, oversees such accounts due to their volatile nature. At the time you purchase your policy, you’re required to designate into which type of investment accounts your money will go.

How Cash Value Accounts Function in a VUL

For all practical purposes, your cash value account functions as a mutual fund. In many VULs, the buyer has 10 to 20 choices to invest their cash value dollars. With so many choices, how do you choose which one is right for you?

Review these points when choosing VUL investment options:
1. Consider your overall financial goals. Just as with any investment, you can align your VUL investment choices with your financial goals, choosing conservative or aggressive investments, or somewhere in between, depending on your level of risk tolerance.

* For example, if you want aggressive growth and know the financial market, you’ll be more likely to select aggressive growth vehicles offered within your VUL.

* On the other hand, if you’re more conservative in your investment goals, you might stick with more “fixed” type of investments offered within your VUL, like a money market fund.

2. Recognize the limits of your VUL. The company sponsoring the policy limits choices for investments in VULs. Shop around before you purchase your VUL to find options that you’re most comfortable with.

* For example, Insurance Company ‘A’ might offers 3 choices for your VUL investments (such as stocks, bonds and money market), whereas Company ‘B’ offers 15 choices (a variety of equities, plus real estate bonds, high-yield corporate bonds and various other investment vehicles).

3. Think about diversification. Another important element related to investment choices for your VUL policy is diversification. Do you feel more secure with many smaller investments?

* Keep in mind that the larger the number of investment vehicles you select, the more you’ll probably pay because you’ll be charged a separate fee for each of these vehicles.

* Some financial experts believe it’s smarter to designate just 2 or 3 investment vehicles to limit the amount of your money that goes to pay investors’ fees for your VUL policy.

4. Take overall investors’ fees into account. Bear in mind that the premiums for VULs are double or even triple the amount you would pay for a term life insurance policy, largely due to the costs of accumulating and managing the funds found in the separate cash value accounts.

* Ensure you understand how and when such fees will be charged, as well as the amounts of fees before you buy a VUL.

5. One option, if available, is to the let experts manage VUL cash funds. In the event you’re unsure about your capacity to make investment decisions, ask your VUL agent if you have the option to have the company’s management professionals manage the cash funds for you. This move, of course, would be most wisely done before purchasing a VUL.

You have options when it comes to selecting how to invest your cash value monies in your VUL. Ensure you understand the ins and outs of your VUL before purchase. As with any investment, remember you can incur financial gains or losses over the short or long term based on decisions regarding your VUL.