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Author: Brandonisme Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75801  
Subject: 7702 Private Plans (indexed universal life) Date: 3/26/2013 8:21 PM
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So I met someone who is trying to sell me on a retirement plan, (already a good start when you are being sold something, right?) that is based off a life insurance policy. I'm trying to find reasons why I wouldn't want to do this, but it seems like it's not really all bad. I'd say it's fairly similar to a roth style IRA in some ways, but of course very different in others. Here's what I've deciphered so far:

Pay in monthly post-tax income.

Certain percentage of money is applied toward death benefit (non refundable) while the rest of the money goes into a liquid, non-taxable account.

That money in the liquid account earns money based off of capped S&P returns, capped at 12% but also prevents any loss at all. If market goes down, you just receive no gains.. but also no losses. You can also access and pull out any of this money at any time, no tax repercussions.

You must maintain certain cash stream into account annually, otherwise it gets pulled from the liquid to pay into the account.

There is a lot more information here in links at the bottom of the post.. feel free to read. Why would I not want to invest in one of these, does anyone have any experience with this type of investment?

I look at this as sort of an alternative to a 401K, which quite frankly I don't see as the most reliable retirement options as it is especially in todays markets...

Any info is appreciated, I'd like to hear others opinions! Thanks!

More info:

http://www.equityintegrationservices.com/7702.html

http://www.pacificlife.com/PL/About+Pacific+Life/Overview/Ov...
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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71500 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/26/2013 8:48 PM
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I'm sure our local product hawker, Dwdonhoff, will be by shortly to tell you they're the best thing invented since sliced peanut butter.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71501 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/26/2013 9:23 PM
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Just google "problems with indexed universal life"

In a nutshell, the insurance company gives you the illusion of safe, solid returns and in return takes a big chunk of your money.

Just based on what you've said, here are a few questions I bet you never even thought about:
"capped S&P returns, capped at 12%"
12% a year? Or 1% a month, or 3% a quarter? It makes a big difference.

Is that cap set in stone, or can the company unilaterally change the cap?

"prevents any loss at all. If market goes down, you just receive no gains.. but also no losses."
If the market goes down, then there is a loss involved. Somebody takes that loss. The only two parties in the deal are you and the insurance company. If *you* are not taking the loss, then *they* are. Why would they do that? How can they stay in business while taking 100% of the losses?

How many pages long is the contract? The one I once read was over 100 pages. Anything that long means they are going to steal you blind. It's too complicated for a mere mortal to understand, which means you'll never be able to spot all the gotchas.

Run away.

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Author: soycapital Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71502 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/26/2013 9:46 PM
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<Run away. >

Good, sound advice..............

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71503 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/26/2013 11:07 PM
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RayVT covered the subject pretty well, but these are similar to Indexed Annuities which are discussed on the Annuities discussion board--

http://boards.fool.com/allianz-fixed-index-annuity-26789478....

Yours emphasized the insurance aspect, but many annuities have a death benefit.

Most insurance products are high cost, but carefully crafted to make them sound attractive.

The 12% cap can be quite a limitation. The stock market often goes in fits and starts. In good years, the cap holds down your gain. The results can be quite a bit less than the S&P 500 over time.

The main advantages of an annuity are that your money grows tax free and your contributions can be much larger than the limits of a Roth or IRA. If after you fund your Roth or IRA and 401k to the max, you will have more to invest, most prefer mutual funds invested in the long term buy and hold style. You pay taxes only when you sell and then at capital gains rates.

But if an annuity still fits your plans, check out the low fee ones offered by Vanguard, Fidelity, TIAA Creft, T Rowe Price and others. In most annuities, surrender fees can make it expensive to move your money if you are dissatisfied with performance. The low fee ones often have low or no surrender fees. Shop around before you decide.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71504 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 9:10 AM
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I'm sure our local product hawker, Dwdonhoff, will be by shortly to tell you they're the best thing invented since sliced peanut butter.

HAHH!!! Apparently since I'm one of the only people not blindered by some kind of religion *I* am the odd one ;~)

IULs are a specifically structured tool, and they do what they are designed to do better than virtually any other financial tool available in the market at present. As with every other financial option, there are things they do not do well, everything has its trade-offs.

Strong Pros;
Zero market loss risks (Ray doesn't understand how option spreading works...)
Market linked gains, tracking from 100% to 140% of the nominated index market(s,)
Lower costs & fees than comparative performance alternatives,
Superior penalty-free liquidity (90% of principal and gains) compared to all alternatives,
Tax free accumulation & growth,
Tax free distribution,
Tax free procession (family financial continuation,)
No mandatory distribution minimums nor maximums,
Annual gains re-set annually, so after a down year where you lost nothing, you actually gain while others attempt to recover from their drawdowns.

Moderate, 'gray area' Pros;
Higher hurdle of asset protection from creditors
Higher hurdle of asset protection from politicians/government
'Some' life insurance death benefits
Safety & market growth at a passive position... little to no attention required.

Downsides/cons;
Not sexy... tax-free returns average 'only' in the mid-8%s
Not sexy... best individual annual return is limited by the cap,
Costs are lower, but they are front-loaded, so there's the emotional hurdle,
Very sacriligious among those who don't/won't/can't weigh out the financial facts calm-minded & cold-heartedly.
Not well designed for liquidity earlier than the 3-4th years,
Average returns for shorter periods can be much lower than the mid-8's, since the zero-loss-zero-gains years can weigh more heavily.
Best performance still requires annual reviews, & potentially strategic adjustments among crediting methods offered, liquidity methods offered, and how the linked death benefits are structured. "Set it & forget it" work OK, but not as well as once-per-year tune ups.

Whenever you hear the fanatics rail about "running away"... just ask them "run to where?" What alternative financial strategy or product performs like this, or better, for cheaper?

I haven't found any yet. When I do, I'll use those when appropriate, just as I use IULs when appropriate.

Dave Donhoff
Leverage Planner

PS. Pac Life is a great company.... sucky IUL design though. If you're going to use the IUL as a tool at all, look for a product with contractually fixed rate distribution loan terms that are still collateralized by your indexed account (not only the fixed interest account.)

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71505 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 10:02 AM
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Well, I can say one thing: Dave's analysis is far more indepth than anyone else's on this thread.

I just bought an IUL myself. I like the idea that I participate in market gains while taking no market losses--ever. And the gains are tax free! Sure, I may be able to find a 10-bagger on my own somewhere among the ruins, but the last thing I want to do is watch the stock market. I've got enough irritation from just living--especially while Owebama is president. (Why should I care that the insurance company takes the losses?)

Also, I have no bias against insurance companies. In my own experience, life insurance bailed my family out of what would have been a catastrophe had my father not had it. I don't know of any investment that you put (for example) $100,000 in, that's working in the market, tax free, but if you die, even tomorrow, you get 4x as much as you put in. Tell a mutual fund that's what you expect and they'll laugh in your face.

I'm with the OP. What's not to like about indexed univeral life policies except maybe, for those who won't take the time to read the contract, you may get spooked by the number of pages. Sheesh.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71506 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 11:22 AM
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So if you don't like the Paclife solution, what company or product do you think is better?

I know just enough about these things to make me dangerous.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71507 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 12:00 PM
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Hi Hawkwin,

So if you don't like the Paclife solution, what company or product do you think is better?

Well, I've found the first step in not being dangerous is not trying to know the best solution for *every* problem... but picking specific problem sets and focusing on the best solves.

I focus on the feature solves as I just listed. You may note that I put 'death benefit' as a moderate pro... and that's a *low* moderate pro (if a concern at all) for the vast majority of my clients. I also put zero weight to all the various features potentially available as riders, like critial care, etc.

My critical focus boils down to;
Best real growth (index blend options, and real cap spreads minus real internal costs,)
Best distribution (lowest loan costs, lowest/zero rate risks, ability to easily switch variable vs fixed rate loans collateralized by the indexed growth account,)
Best design flexibility (shortest surrender lengths, shortest max-pay periods.)

At present, the IUL market is at the elbow of a hockey-stick explosion. All of us (meaning 'us' in the unwashed general public) are about to be awash in media pieces about IULs, and insurance companies (many who have never been in the growth-focued game before) are rushing new products to market... we'll probably see 12-20 new carriers launching IULs this year.

That said, *at present* the best offers I know off are from;
Allianz
Penn Mutual
North American
Minnesota Life* (*the only IUL I would consider that offers no fixed loan tied to the growth account... because of an outperforming index blend they offer that other 'variable loan' carriers do not. I pretty much only go with this for New York** cases, if it performs in projections better than Penn or North American.)
(** New York is functionally a seperate country as far as insurance goes, and many companies either offer dramatically less robust plans there, or just don't bother at all.)

Cheers,
Dave Donhoff
Leverage Planner

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71508 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 1:10 PM
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(** New York is functionally a seperate country as far as insurance goes

hah! True dat.

I have two sytems to look up quotes for various products. One for NY, and one for everyone else.

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Author: Brandonisme Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71509 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 5:04 PM
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Thanks for the responses so far.. interesting reading the different opinions. I'd say I'm reading better arguments from the pro than the con side at the moment. Has anyone heard of these things going sour? The people that are against this aren't really making specific arguments why this is bad, more just overall statements like; if they are getting commission they are screwing you and if the contract is really long it must be a scam. I am actually hearing more logical arguments why this may not be all that bad of a way to go.

Appreciate the feedback, still curious to see some further good points from the people against this plan AND alternatives to it.

I think another reason high commission is supposed to be justified, is because with something like this you sign up once and that's where your money goes. When you are investing in individual funds / stocks, there's so much money handling going on the commission can be smaller because the brokers continually get commission as money is moved around... correct me if I'm wrong..

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71510 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 5:06 PM
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Dave's analysis is far more indepth than anyone else's on this thread.

Um, that wasn't an analysis, that was a list of pros & cons (as Dave sees them).
It's rather telling that you think it was either an analysis or in-depth.

I may be able to find a 10-bagger on my own somewhere among the ruins, but the last thing I want to do is watch the stock market.
And the grapes are probably sour anyway.

And the gains are tax free!
There is no gain anywhere that is "tax-free". Not if you are a US citizen. The IRS isn't in the business of letting people make money without taking a cut of it. Don't confuse "tax free" with "tax deferred".
That's like the gullible people who fall for the bit about dividends from a whole-life policy being tax free. What they actually are is not dividends but return of excess overpayment -- so says the IRS, which is why they don't get taxed.

IUL's are indexed to the raw value of the index, EXCLUDING dividends. People kinda think, "No big deal, the dividends are pretty small, so I'm not missing out on much." Wrong. If you started out with $10,000 in the S&P in 1993, using the price-only index it would be worth $34,000 today. But including dividends it would be worth $50,000. That's 45% more.

And you are assuming that the index cap is fixed and won't ever be lowered. Most of the IUL contracts I've seen say that the company can unilaterally reduce the cap.

I just bought an IUL myself. I like the idea that I participate in market gains while taking no market losses--ever.
So you fell for the illusion.

More numbers and actual, y'know, math analysis coming up.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71511 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 5:24 PM
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Has anyone heard of these things going sour?

Insurance companies are strictly regulated at the state level for exactly that reason. Their financial stability is rated by AM Best. As part of your due diligence you will want to look into the AM Best rating of the company you deal with.

(Sometimes the product is rebranded with the result that an AM Best rated company stands behind the policy even if the brand name on yours is not listed.)

So far the industry has always been able to rescue failing insurance companies. Many worried back in the days of the collapse of junk bonds, and you have to wonder about major bubbles in the future, but so far so good.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71512 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 5:27 PM
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Here's the actual math analysis.

In another thread on another (but related) topic, we did an analysis on the actual historical monthly returns, to see how often the return was greater than an X% cap. We were all assuming that the number of months with a gain of 2% or more was small. The actual count was surprisingly large.

That thread was concerned with monthly returns, but for IULs it is more appropriate to do quarterly.
When they say "12% cap" they mean 1% a month or 3% a quarter, not 12% a year. The longer the period, the better it is for you. The following figures are for a 3% quarterly cap, based on rolling quarters from 1993 to present.

Here's the breakdown.
The count on a row is the number of rolling quarters which had a return between the gain on that row and the next row. IOW, 11 quarters had gain more than 0.00% and less than 1.00%.
There were 20 (11+9) periods with a gain of up to 2%. There were 30 periods (10+20) with a loss of less than 2%. So by just counting good vs. bad periods, you'd be inclined do a little happydance. You got a small gain 20 times and avoided a similarly small loss 30 times.


*** Distribution of returns, excluding dividends***
** Counts at the max & min endpoints may not be right.
Gain Cnt Pct Cum_pct
-20% 9 3.9% 3.9%
-11% 5 2.2% 6.0%
-10% 1 0.4% 6.5%
-9% 3 1.3% 7.8%
-8% 3 1.3% 9.1%
-7% 1 0.4% 9.5%
-6% 8 3.4% 12.9%
-5% 8 3.4% 16.4%
-4% 3 1.3% 17.7%
-3% 12 5.2% 22.8%
-2% 10 4.3% 27.2%
-1% 20 8.6% 35.8%
0% 11 4.7% 40.5%
1% 9 3.9% 44.4%
2% 20 8.6% 53.0%
3% 10 4.3% 57.3%
4% 17 7.3% 64.7%
5% 15 6.5% 71.1%
6% 11 4.7% 75.9%
7% 14 6.0% 81.9%
8% 9 3.9% 85.8%
9% 6 2.6% 88.4%
10% 7 3.0% 91.4%
11% 9 3.9% 95.3%
15% 11 4.7% 100.0%
Tot 232 100.0%

The highest quarterly return was 20%. The worst was -39% loss.

57% of the quarters had a gain of less than 3%. Which means that 43% of the time you ran into the cap.

This data also shows that you got protected by the floor 60% of the time, and that's a Good Thing.

But the numbers of floored and capped periods aren't the main thing. What matters is the amounts of the dollars that are protected and foregone. If you duck 1 loss of 7% but forego 7 gains of 7% (gain of 10% capped at 3%), that's not a good trade-off.

That's the statistics on the distributions of the returns.
Now let's look at the actual outcome, applying the 0% (no losses) floor and the 3% caps on each rolling quarter, 1993 to present -- 20 years. This period encompasses two large bear markets, the 2001 dot-com bust and the 2008 financial melt-down.

The maximum return is indeed 3% and the minimum is indeed 0%. That's compared to the unfloored and uncapped figures of 20% and -39%.

The overall CAGR (compound annual growth rate) was 6.8%, which means that $10,000 would have grown to $37,619.

Compared to the return of the actual S&P500 including dividends, with no loss floor and no maximum cap, which had CAGR of 10.2%, and $10,000 would have grown to $70,323.

The graph of the equity curves is interesting. http://i1131.photobucket.com/albums/m543/rayvt/EquitycurvesS... The S&P500 (including dividends) equity swings up and down, while the IUL marches sedately upward. But the S&P equity is always quite a bit higher than the IUL equity, except for one short period in the 2008-2009 bear market.

But ... $70K vs. $37K. $33,000 You pay a very hefty price for the comfort of a never-falling value.

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71513 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 5:35 PM
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Rayvt,

IUL's are indexed to the raw value of the index, EXCLUDING dividends. People kinda think, "No big deal, the dividends are pretty small, so I'm not missing out on much." Wrong. If you started out with $10,000 in the S&P in 1993, using the price-only index it would be worth $34,000 today. But including dividends it would be worth $50,000. That's 45% more.

just to add to this: How many years was the S&P up over 12%? IUL's would not have participated in that.

Gene

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71514 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 5:50 PM
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That said, *at present* the best offers I know off are from;
Allianz
Penn Mutual
North American


Luckily I have a favorite quote on topic: "If it's not worth doing, it's not worth doing well." ;-)

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71515 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 6:35 PM
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just to add to this: How many years was the S&P up over 12%? IUL's would not have participated in that.

Conveniently, it was simple to add that to my spreadsheet and see.

This is for all rolling 12-month periods 1993 to present, not merely calendar years. AFAIK, IULs go by an anniversary date, not calendar year, so rolling periods give a more accurate picture of the statistics.

For S&P500 including dividends: 10.4% CAGR, $10K grows to $72,937. Maximum 12-month return +51%. Worst 12-month loss: -45%.

With 0% floor and 12% cap, CAGR 8.0%, final value $42,232.

The stats don't change all that much. Some, but not a lot. You're still some $30K behind.

Distribution of returns:

*** Distribution of returns, excluding dividends***
** Counts at the max & min endpoints may not be right.
Gain Cnt Pct Cum pct
-45% 36 16.0% 16.0%
-11% 3 1.3% 17.3%
-10% 0 0.0% 17.3%
-9% 2 0.9% 18.2%
-8% 3 1.3% 19.6%
-7% 2 0.9% 20.4%
-6% 0 0.0% 20.4%
-5% 2 0.9% 21.3%
-4% 1 0.4% 21.8%
-3% 2 0.9% 22.7%
-2% 4 1.8% 24.4%
-1% 1 0.4% 24.9%
0% 4 1.8% 26.7%
1% 5 2.2% 28.9%
2% 4 1.8% 30.7%
3% 4 1.8% 32.4%
4% 7 3.1% 35.6%
5% 6 2.7% 38.2%
6% 11 4.9% 43.1%
7% 2 0.9% 44.0%
8% 4 1.8% 45.8%
9% 9 4.0% 49.8%
10% 7 3.1% 52.9%
11% 4 1.8% 54.7%
12% 19 8.4% 63.1%
15% 19 8.4% 71.6%
20% 32 14.2% 85.8%
25% 14 6.2% 92.0%
30% 10 4.4% 96.4%
35% 4 1.8% 98.2%
40% 4 1.8% 100.0%
51%
Tot: 225 100.0%

You got capped 37% of the periods, and protected by the floor 27% of the periods.
You sure wouldn't be doing a happydance on those years where the S&P gained 30% or 40% or 50%(!!!) and you just got a measly 3%. Well, maybe you wouldn't even notice -- if you're the type of person who doesn't want to do anything more than give an insurance company a slug of your money and depends on them to give you a good retirement income. We have a few people like that here (a semi-retirement community). We call them "the 70 year-old part-time Walmart greeters and Dollar General checkout clerks." 'course, they do get to see all the deer & cougars & foxes on the roads as they drive to work just before sunrise.

(Sorry, I shouldn't snark. Bad habit of mine.)

Looking at this closer, it seems worse than I first thought. So many of the loss rows have low single-digit counts, and a lot of the high gain rows are in double-digits. (Although that many just be an artifact of the bucket sizes I picked.) This sure shows the fat tail at the high loss end.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71516 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 6:46 PM
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So, is that enough non-handwaving? Just cold hard data and statistics of the actual S&P500 market returns for the last 20 years.

You get to make your choice. Which is appropriate. Everybody have their "sleeping point". De gustibus non est disputum.

As everywhere in life, there are tradeoffs. And you get to pick which one you personally prefer.

If you want stable, never-declining returns, go for a IUL.

If you want high returns that aren't steady and sometimes decline, eschew a IUL and invest directly in the index.

What you CANNOT choose is a stable, never-declining return that is high return.

Ain't nobody out there who's aiming to hand out buckets of money to people who don't want to learn to invest. But there's plenty of people who will gladly give you a stable return in exchange for them keeping the lion's share of the gains.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71517 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 7:05 PM
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And the gains are tax free!
There is no gain anywhere that is "tax-free". Not if you are a US citizen. The IRS isn't in the business of letting people make money without taking a cut of it. Don't confuse "tax free" with "tax deferred".

Uh, Ray... ever heard of the newfangled IRS code regarding "ROTH" accounts?
Yeah... 'tax free'...

Oh... and when you have time on your hands, you can look up the IRS code referenced in this very thread subject title... it will give you a clue about how you can grow money tax free. Even as a U.S. citizen.

That's like the gullible people who fall for the bit about dividends from a whole-life policy being tax free. What they actually are is not dividends but return of excess overpayment -- so says the IRS, which is why they don't get taxed.
Excellent point... but irrelevant.

IUL's are indexed to the raw value of the index, EXCLUDING dividends. People kinda think, "No big deal, the dividends are pretty small, so I'm not missing out on much." Wrong.
Actually, people think "who gives a crap what its indexed to... at 8%-ish tax free it oculd be indexed to the snail trails on the sidewalk after a rain, for all I care!

If you started out with $10,000 in the S&P in 1993, using the price-only index it would be worth $34,000 today. But including dividends it would be worth $50,000. That's 45% more.

We've already been around this mulberry bush before, remember?
The floor/cap indexing strategy outperforms the S&P in most markets,
But far more importantly, you'll never be caught with your pants around your ankles in a down market urgently needing your capital, but being told to "hang on for the lon haul."
http://boards.fool.com/does-anybody-who-is-pushing-these-do-...

And you are assuming that the index cap is fixed and won't ever be lowered. Most of the IUL contracts I've seen say that the company can unilaterally reduce the cap.
Companies are competitively pressured to keep their caps as high as their safe-leg yield allows. A few have tried to drop their caps below the competitive field, and quickly saw their general account reserves decimated by an exodus of contract holders. Due to the dropping interest rate trend of the last 35 years, we are most likely at or near the lowest levels the caps are ever likely to go industrywide.

That thread was concerned with monthly returns, but for IULs it is more appropriate to do quarterly.
Nobody calculates quarterly. There are various crediting methods that can be chosen (even mixed & matched,) but the overwhelming most common is annual point-to-point. Its also the easiest to compare & calculate on a simple apples-to-apples basis.


When they say "12% cap" they mean 1% a month or 3% a quarter, not 12% a year.
These kinds of statements, alone, are telling of the ignorance you have of the products and industry. A 12% cap means annually, not 1% monthly or 3% quarterly.

Even crediting methods that calculate monthly don't do it on a 1/12th of the annual cap basis.

The longer the period, the better it is for you.
THIS IS TRUE!

Although annual is common, there are several product designs offering a choice of a 5 year point-to-point, and at least one offering a rolling annual 5 year point-to-point calculation.

Again, none of this is magic, and I can explain to anyone interested how to structure a trade using your own money to achieve the same results... but not as cheaply as inside the IUL contracts. Nothing outside the insurance industry can do the same results at less costs.

Gene;
just to add to this: How many years was the S&P up over 12%? IUL's would not have participated in that.
Its the equivalent of agreeing to play baseball with rules saying the at-bat batter can never proceed past 3rd base on his own hit, but no batter will ever be thrown, pop, or strike out. You give away the home runs (including the sexy grand slams,) but you also remain undefeated.

It doesn't matter how many homeruns you rack up if you're behind on the scoreboard when the innings run out.

Again, refer to previous work already done;
http://boards.fool.com/does-anybody-who-is-pushing-these-do-...

Cheers,
Dave Donhoff
Leverage Planner

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71518 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 7:11 PM
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Thanks for the responses so far.. interesting reading the different opinions. I'd say I'm reading better arguments from the pro than the con side at the moment. Has anyone heard of these things going sour? The people that are against this aren't really making specific arguments why this is bad, more just overall statements like; if they are getting commission they are screwing you and if the contract is really long it must be a scam. I am actually hearing more logical arguments why this may not be all that bad of a way to go.

Appreciate the feedback, still curious to see some further good points from the people against this plan AND alternatives to it.


We had a long thread or two on these, might be worth seeing if the dysfunctional search function yields anything.

However, I'll drop my pocket lint since we're on the topic. I'm not that old yet [kaff,wheeze], but I'm old enough to remember when regular UL's were very popular and commonly sold as retirement vehicles. The reason why they were popular is that back when interest rates were high, a salesman could show you a chart demonstrating stunning past returns and it was easy to see that by retirement age your main problem would be deciding which Hawaiian Island you wanted to buy.

Of course what really happened is that as interest rates dropped, many policies were underfunded and went bust, and to add insult to injury that's a taxable event. So all the advantages the salesman said were going to be there, really weren't. There might be a lesson in there somewhere.

Since you are talking about retirement investing, presumably you are looking at long-ish time horizons. Just for discussion let's say 20 years. It would be a worthwhile exercise to spend a few minutes in Excel and look at all the 20 year rolling periods starting in 1928 to the present day and see if this thing makes any sense. It would take a bit of doing, but you could knock it out in an evening. If in fact it comes out money ahead most periods then it might be something to start thinking about.

However, that's only a starting place, that backtest still won't tell all you need to know. You need to know how this thing would have actually performed over time. If you look at the fine print, you'll find the insurance company can drop the upper cap down to as low as 3%. I guarantee that you won't beat the market over any non-trivial period of time with a 3% cap. The only way to do it is to go back and calculate the implied-volatility, input into Black-Scholes or whatever pricing model you are using, and then calculate the actual cap, THEN do the backtest. That would tell you if these things are likely to outperform over any long period of time. That would be one whole helluva lot of work. My Excel fu is strong, but it isn't that strong.

Two final words about risk. AFAIK, these thing have only been around ~10-15 years-ish. As with the UL policies, just because the salesman can show you a chart how they outperformed during some recent period it does not follow that out performance will continue into the future. If you are content making investments based on the past ten years, buy gold. Gold blew the doors off IULs. To put it another way, if you are making long term investing decisions based on only ten-ish years of data, you are taking on risk, not avoiding it.

The final word is that over long periods of time--like 20 years, the market risk is actually very low. You can reduce that risk even more by simply adding cash to your portfolio. The ability to avoid downside risk is valuable in the short term, not in the long term.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71519 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 7:16 PM
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Brandonisme: "Thanks for the responses so far.. interesting reading the different opinions. I'd say I'm reading better arguments from the pro than the con side at the moment. Has anyone heard of these things going sour? The people that are against this aren't really making "specific arguments why this is bad, more just overall statements like; if they are getting commission they are screwing you and if the contract is really long it must be a scam. I am actually hearing more logical arguments why this may not be all that bad of a way to go."

Pay attention to RayVT.

Do you need life insurance? Have you maxed out other tax advantaged investment/retirement account choices? Are you prepared to overfund the policy without becoming a Modifeid Endowment Contract? Do you intend to the life insurance in force for your entire life?


"I think another reason high commission is supposed to be justified, is because with something like this you sign up once and that's where your money goes. When you are investing in individual funds / stocks, there's so much money handling going on the commission can be smaller because the brokers continually get commission as money is moved around... correct me if I'm wrong.."

More money for less work? Sales people must love you. Or is there any chance that you are an insurance salesperson? I trust not, but you are new and your only posts are about IUL policies.

See also:

http://helpdesk.blogs.money.cnn.com/2012/07/09/indexed-unive...

http://www.slideshare.net/AlDeRemigis/indexed-universal-life... (from someone interested in selling IUL policies, but still a decent basic explanation)

http://www.producersweb.com/r/IIG/d/contentFocus/?pcID=d1c6f...

"They are merely facts that buyers should keep in mind and seriously consider before committing their hard-earned dollars to this retirement savings strategy.
1. Buying index universal life is a long-term commitment. . . .
2. The requirement to pay mortality charges. . . .
3. The ability of the carrier to change mortality charges. . . .
4. Possible bond-like returns over time. . . .
5. The ability of the carrier to change some element of the interest crediting formula. The carrier does this simply because it is unaffordable for the carrier to provide a strong long-term guarantee on the index-related interest crediting formula. . . .
6. Illustrations are unreliable. . . .
7. Management changes at the carrier can result in bad treatment. . . .
8. Contract lapse can create a tax disaster. . . .

However, a truly informed customer should enter an index universal life contract with full knowledge of these eight cautionary items. For the reasons stated above, it makes sense to diversify across a variety of retirement savings strategies, and not to rely upon index universal life as your sole retirement strategy."

Id.

Regards, JAFO


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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71520 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 10:39 PM
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I find thes IUL threads informative, educational, and entertaining.

I get a chance to download some historical data into Excel and polish up my spreadsheet skills. And Dave gets to argue about how you CAN TOO polish a t*rd until it shines like a gold bar.

Dave, did you look at the equity curve chart I uploaded? It kinda demolishes the contention that The floor/cap indexing strategy outperforms the S&P in most markets. True, it only goes back to 1993, because that's the inception date of SPY. It could be extended back to 1976 by using VFINX, but I have no doubt that it would look essentially the same. (Dang! Yahoo only has VFINX back to 1987. Well, maybe I'll grab what they have.)

There's not a big difference in using monthly, quarterly, or annual periods. What I posted shows that pretty clearly. At any rate, I relied on information I found with google, like "Each indexed segment has a segment date where the beginning value of the underlying equity index is recorded and the percentage change in the index value is calculated. Segment index periods vary by company. ... There are several methods of excess interest crediting based on rate changes over daily, monthly and annual periods, such as annual point-to-point, monthly averaging, daily averaging and variations on these methods.
...
The index-crediting method is the process of calculating the index growth rate at the end of the index period. Nearly every company offering EIUL today uses the annual point-to-point method.
"

Whether you use a cap of 12% annual or 1% month or 3% quarter, it makes little difference. I did it first for 1% monthly, because I already had a spreadsheet that did that. But changing it to annual or any other period is simple.

I notice that you didn't make any comment or come-back on the difference in final values between the S&P500 and the floored/capped strategy. A difference of growing a $10K initial investment from $37K to $70K would seem to be a big deal.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71521 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/27/2013 11:43 PM
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So, anyway, here are the stats for VFINX (S&P500 index) for rolling 12-month periods, 1987 to present.
The equity curves chart is here: http://i1131.photobucket.com/albums/m543/rayvt/Equitycurves1...
We were unfortunate enough to start just in time to catch the Black Monday (Oct 1987) crash. But after that, the plain old boring buy-and-hold of VFINX is always solidly ahead of the IUL floored/capped strategy.

The worst 12-month loss was -30%. The best 12-month gain was 46%. The IUL method has a 0% floor (so you are protected from losses) and 12% cap on the returns.
22% of the periods had a loss. 35% of the periods had a gain of more than 12%.
Final values for a $10,000 initial investment: VFINX (incl dividends): $79,908. Floored/capped IUL method: $32,870

Here's the distribution of the rolling 12-month returns.

Gain Cnt Pct Cum pct
-30% 2 0.9% 0.9%
-25% 11 4.9% 5.8%
-20% 6 2.7% 8.4%
-15% 7 3.1% 11.5%
-12% 5 2.2% 13.7%
-10% 1 0.4% 14.2%
-9% 1 0.4% 14.6%
-8% 3 1.3% 15.9%
-7% 1 0.4% 16.4%
-6% 0 0.0% 16.4%
-5% 0 0.0% 16.4%
-4% 2 0.9% 17.3%
-3% 3 1.3% 18.6%
-2% 2 0.9% 19.5%
-1% 2 0.9% 20.4%
0% 4 1.8% 22.1%
1% 3 1.3% 23.5%
2% 4 1.8% 25.2%
3% 2 0.9% 26.1%
4% 7 3.1% 29.2%
5% 7 3.1% 32.3%
6% 13 5.8% 38.1%
7% 10 4.4% 42.5%
8% 11 4.9% 47.3%
9% 10 4.4% 51.8%
10% 7 3.1% 54.9%
11% 6 2.7% 57.5%
12% 16 7.1% 64.6%
15% 25 11.1% 75.7%
20% 25 11.1% 86.7%
25% 16 7.1% 93.8%
30% 10 4.4% 98.2%
35% 2 0.9% 99.1%
40% 2 0.9% 100.0%
46% 100.0%
Total 226

==========================
So that's the data and the analysis I have for the way IUL interacts with the actual historical returns of the S&P500 index for the last 26 years. Hard data, no handwaving.
Maybe I'm wrong. Show me where. Show me what I've missed. Show me data data and analysis that demonstrates that IUL works better.

Yup, I'll grant that the volatility of the S&P is high. I'll grant that some people may not be able to stomach that, and won't be able to sleep. Those people will have to decide if it's worth taking a $37,000 haircut to avoid the pain.

========================
BTW, there are simple methods to tweak the buy-and-hold strategy which dramatically reduces the volatility but lowers the overall gain only a little bit. But that's another topic.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71522 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 1:34 AM
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Hi Ray,
I can make this simple and short;

Maybe I'm wrong. Show me where. Show me what I've missed. Show me data data and analysis that demonstrates that IUL works better.

Scroll up just 5 posts to my most previous response.
The one where I linked the *last* time I showed you.
The data hasn't changed, nor have the results.

Here, I'll even make it so you don't have to scroll up for the link;
http://boards.fool.com/does-anybody-who-is-pushing-these-do-...

You're simply juggling numbers out of real sequential order, and confusing yourself. The order of returns (and losses) matters.

I notice that you didn't make any comment or come-back on the difference in final values between the S&P500 and the floored/capped strategy. A difference of growing a $10K initial investment from $37K to $70K would seem to be a big deal.
I didn't comment because its a bogus false dilema. There is no "difference" of a gain lost when you've been forced to liquidate your "buy and hold" portfolio during drawdown years. You're simply S.O.L.

Its the exact same argument that you always use for paying up the premium for a 30 FRM. Since these are the funds (or home) you rely upon for living within, you can't afford to lose them, not even "only once in a while."

Yup, I'll grant that the volatility of the S&P is high. I'll grant that some people may not be able to stomach that, and won't be able to sleep.
Mighty magnanimous of you.

Those people will have to decide if it's worth taking a $37,000 haircut to avoid the pain.
Except that they do not have to make that decision. The decision is whether they are willing to risk finding themselves "struck out at the bottom of the 9th" with a loss of their living funds when they no longer have the time or resources to recover, all in the hopes of chasing the rare home run return greater than the capped and floored approach.

FORTUNATELY, its really not even a decision of that... as the users of an IUL retain the freedom to pull liquid funds for superior side investments that have high probabilities of generating high returns... no penalties or restrictions incurred.

You can eat your cake, and have it too, without the tragedy of losing it passively as so many blind "buy and hold through the pain" investors have.

Cheers,
Dave Donhoff
Leverage Planner

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71523 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 4:44 AM
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Um, that wasn't an analysis, that was a list of pros & cons (as Dave sees them). It's rather telling that you think it was either an analysis or in-depth.

Oh, for cryin' out loud, detailing the pros and cons, as a starting point, IS analysis. If the OP wants even more indepth analysis, I'm sure Dave can provide it.

What's the matter, Rayvt, did someone who beat you at soccer grow up to be an insurance agent? You sure have a hard-on for insurance companies and the people who sell their products.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71524 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 4:47 AM
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There is no gain anywhere that is "tax-free". Not if you are a US citizen. The IRS isn't in the business of letting people make money without taking a cut of it. Don't confuse "tax free" with "tax deferred."

Au contraire. The money you put in is presumed to be pre-tax, but the GAINS are, yes, tax-free, not tax deferred.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71525 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 5:22 AM
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Those people will have to decide if it's worth taking a $37,000 haircut to avoid the pain.

Except that they do not have to make that decision. The decision is whether they are willing to risk finding themselves "struck out at the bottom of the 9th" with a loss of their living funds when they no longer have the time or resources to recover, all in the hopes of chasing the rare home run return greater than the capped and floored approach.

Bingo! This is the basis on which I made my purchase decision. I've read about many people who, at the precise moment in time when they need to retire, their nest egg gets wiped out. Had they been in an IUL, they could have retired with no diminution of their nest egg. None. Perhaps they could have made a bit more investing on their own (see My Stock Market Seminar at link below), but I have no control over the downs of the market and where I'm going to be (in terms of retirement) when they occur.

My Stock Market Seminar
http://static6.businessinsider.com/image/512cf09becad04a1590...

Oh, and here's the story behind the graph.

The Next Stock Market Crash: Why Many Pros Think It Has Already Begun

http://www.businessinsider.com/stock-market-crash-2013-2?op=...

So go ahead, Rayvt, put your money in the S&P and have a blast.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71526 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 5:28 AM
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BTW, there are simple methods to tweak the buy-and-hold strategy which dramatically reduces the volatility but lowers the overall gain only a little bit. But that's another topic.

And while you're doing all this, your family prays you won't die, because they wouldn't have a clue how to pick up where you left off. But if you died with an IUL, your estate would get much (much!) fatter check than if you were still around, tweakin' 'n reducin'.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71527 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 5:52 AM
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Meanwhile, the Euro is breaking down this morning.

http://www.businessinsider.com/the-euro-is-crumbling-march-2...

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71528 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 7:55 AM
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The money you put in is presumed to be pre-tax, but the GAINS are, yes, tax-free, not tax deferred.

I think you meant to say the money you put in is post-tax. You are funding it with after-tax income. Also the gains only remain tax-free if the policy does not lapse.

PSU

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71529 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 9:11 AM
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Thanks for the responses so far.. interesting reading the different opinions. I'd say I'm reading better arguments from the pro than the con side at the moment. Has anyone heard of these things going sour? The people that are against this aren't really making specific arguments why this is bad, more just overall statements like; if they are getting commission they are screwing you and if the contract is really long it must be a scam. I am actually hearing more logical arguments why this may not be all that bad of a way to go.

I avoid the various flavors of UL because it is a lifetime commitment. If you decide that it isn't right for you in first several years, you are hit with heavy surrender charges. If for reason you want or need to cancel the policy later, those tax-free distributions (loans) become taxable. If you start at age 30 for example, you may be making a 50-60 decision. What will happen during those years? Will the tax code change to make other products more compelling or the IUL less compelling?

Ray and Dave have been arguing over the product for years. The part I don't like is that I get a fibe from Dave that this product is good for a larger portion of the population that it really is. This is for the higher income earner who has already funded his/her Roth IRA (if eligible) and at least their 401k for the matching. It isn't for the average family earning the mean US income. The policy requires funding it in excess of the mortality charges. If something were to disrupt your income, you would need the policy to be self-funding or it will lapse and you have a date with the IRS for your "tax-free" earnings. Dave will tell you that you can overfund it enough in 4 years to make the policy lapse-proof. He may or may not be right - I wouldn't know since he has not put up an illustration for how much would be needed for a certain sized IUL. Dave is more than capable of putting an illustration together, picking an average sized IUL, person in average health, and posting the numbers. The illustration would show how much of the premium is going to the death benefit portion of the premium, how much is going to fees and how much is going into your asset account. Until I see an illustration, I treat his posts much like the financial planner that sold me a VUL years ago - a slick salesman.

PSU

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71530 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 10:45 AM
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Dave, your example is for a 17 cap. Those arent available anymore.

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Author: RatioFool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71531 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 10:55 AM
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Ray,

I agree with everything you wrote except for one thing:

De gustibus non est disputum.

I think it should read:

De gustibus non disputandum est.

Best,

Ratio

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71532 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 11:55 AM
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I think you meant to say the money you put in is post-tax. You are funding it with after-tax income.

Yes; thanks for the correction.

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Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 12:07 PM
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This is for the higher income earner who has already funded his/her Roth IRA (if eligible) and at least their 401k for the matching.

These retirement plans were conceived by the U.S. Congress--the same folks who brought us 906 pages of OwebamaKare, which bill's wheels are already falling off.

Pillars of OwebamaKare are crumbling
http://dailycaller.com/2011/10/19/the-pillars-of-obamacare-a...

401(k) plans are not without their own flaws.

~ Limited flexibility: The plans offered by a large percentage of employers are noticeably short on options. Be sure that you have a good understanding of where the funds are being invested.

~ IRA deductibles excluded: Plan holders that contribute to their 401(k) can reduce--or possibly even eliminate--the income tax deductions allotted for an IRA.

~ Taxable income upon withdrawal: When a plan holder begins to withdraw money, it is taxed as additional income. There are also penalties for early withdrawal, with taxation up to 20% plus a 10% penalty if you withdraw before age 59 1/2.

~ Required withdrawals at age 70 1/2: Plan holders must being receiving distributions by age 70 1/2. If you're still working at that time, you may be subject to a higher tax rate than if you were retired.

~ Waiting periods: There is often a waiting period before employees can initiate a 401(k) plan with an employer, often times six months or up to one year.

Likewise, IRA accounts aren't flawless, either.

~ Limited contribution maximum: An IRA will allow the holder to deposit up to $5,000 if 49 years old or younger; or $6,000 if 50 or older.

~ Low contribution rate: IRAs have a low contribution rate. For those beginning an IRA retirement plan later in life, the contribution rate may not be enough.

~ Penalties for early withdrawal: As with the 401(k), there are penalties for early withdrawal.

~ Required withdrawals at age 70 1/2: Policyholders are also required to begin withdrawing money by 70 1/2 years of age.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71534 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 12:09 PM
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De gustibus non disputandum est

Translation: The implication is that everyone's personal preferences are merely subjective opinions that cannot be "right" or "wrong," so they should never be argued about as if they were.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71535 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 1:00 PM
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Hi PSUE,

I avoid the various flavors of UL because it is a lifetime commitment. If you decide that it isn't right for you in first several years, you are hit with heavy surrender charges.
Nope, that's not true at all. It performs *better* if treated as a financial cornerstone to your balance sheet, but it can be unwound & exited over a reasonable time period at far less bloodshed than if you're sitting on a drawn down "buy and hold" position, from which there is no escape but wait & pray.

Further, you have from 80-90% liquidity of principal and gains from day #2, if desired.

If for reason you want or need to cancel the policy later, those tax-free distributions (loans) become taxable.
Only on the gains you borrowed, and only if you don't pay them back prior to unwinding.

In contrast, you can't get tax-free loans against your securities greater than 50% max, and getting anywhere near that level puts you at risk of margin calls that can force you to book permanent position losses when you can least afford it. If you sell & withdraw your cash instead of collateralizing a loan on your securities, you book the loss, and lose all the forward gain potential from the position you abandoned.

Don't forget, anyone in the securities market (even after sitting on buy & hold positions for over 30 years) took an up to 50% "surrender charge" when they were forced to sell in order to take income when the markets had collapsed.

With IULs the maximum "surrender charge" is defined from day 1, and declining daily through a prescheduled period... and entirely avoidable via loan liquidity.

If you start at age 30 for example, you may be making a 50-60 decision. What will happen during those years? Will the tax code change to make other products more compelling or the IUL less compelling?
Again, in comparison the IUL is *exponentially* better suited for making future changes than a buy & hold naked securities position, simply because there *ARE* unwinding options. When you're holding naked securities that have dropped 20%, 30%, 50% or more from your entry, you have no options.

Ray and Dave have been arguing over the product for years.
Ray is *AWESOME* and some day I'll get the chance to buy him a beer in person. We agree on 99.65% of our opinions, and on that 0.35% he does me the honor of loyal opposition with easy-to-crush arguments... and does so while remaining a gentleman (if a sharp toothed gentleman.) What more could I ask for!?!

The part I don't like is that I get a fibe from Dave that this product is good for a larger portion of the population that it really is.
Can't help you on that vibe (nor fibe) thing... I really have no idea what "portion of the population" wants what this offers.

I *DO* know what the features *ARE* that it offers.
We can define & declare those, and let those who want those results take them.


This is for the higher income earner who has already funded his/her Roth IRA (if eligible) and at least their 401k for the matching. It isn't for the average family earning the mean US income.
IULs outperform 401ks structured for similar safety and performance, handily (even considering typical freebie matching contributions.) It does so regardless of the owner's income.

IULs outperform traditional ROTH IRAs handily. Those savvy enough to actively structure alternative investments inside self-directed ROTHs may indeed have an advantage... but then we're talking about passive versus active management, so the IUL is still a good foundational cornerstone for the 'family banking system.'

The policy requires funding it in excess of the mortality charges.
That's misleading. Its easier to understand that any given amount of working capital requires a minimum amount of death benefit (as defined by the IRS codes of TEFRA, DEFRA & TAMRA) to keep the special treatment available inside the IUL design.

Your not "adding cash on top of a life insurance policy"...
You are "wrapping the very least amount of life policy possible around the capital you want to have perform."


If something were to disrupt your income, you would need the policy to be self-funding or it will lapse and you have a date with the IRS for your "tax-free" earnings. Dave will tell you that you can overfund it enough in 4 years to make the policy lapse-proof. He may or may not be right - I wouldn't know since he has not put up an illustration for how much would be needed for a certain sized IUL. Dave is more than capable of putting an illustration together, picking an average sized IUL, person in average health, and posting the numbers. The illustration would show how much of the premium is going to the death benefit portion of the premium, how much is going to fees and how much is going into your asset account. Until I see an illustration, I treat his posts much like the financial planner that sold me a VUL years ago - a slick salesman.
I'll do exactly this for you (to my knowledge, you've never asked before... though I do recall offering before unaccepted.) Give me through the day... real work awaits me ;~)

==================

Hi Sykesix,
Dave, your example is for a 17 cap. Those arent available anymore.
Who were you listening to that told you that?
17% caps are available, and higher actually!

==================

Folks,
This is exponentially easier than you are making it out to be.

There is no argument to be had about the features... you either want to take risks of loss, or you do not. If you don't mind risks of loss, there are lots of ways that you can get higher performance sometimes, as long as you can stomach and wait out the drawdowns.

IULs are for people who want the best growth and distribution performance with zero risk of market loss.

That can be done without using the insurance industry... it just can't be done as cheaply as available in the insurance industry. This is because the IRS code allows the insurance industry to do things the naked securities industry cannot.

The biggest "secret sauce" in the mix is the safe returns on new money in the general account. The insurance world is currently providing about 5.5% tax free safe returns, principal guaranteed. The same money outside the insurance world is fighting hard to earn 1%, taxable, at the same level of safety.

That 4-5% advantage the IRS code grants the insurance world allows them to buy option spreads that provide all the "magical no-market risk upside returns." You can buy the exact same spreads yourself at www.CBOE.com but you won't have the 4-5% "free yield" to spend doing so from safe yields outside the insurance world.

The costs of entry to get the "special sauce" returns in the insurance world is about 1% annual average of your working capital, all martality (death benefit) costs, commissions, loads, charges and 'junk fees,' included.

You just can't do it for that outside the IRS competition-sheltered regulatorily-protected environment of the life insurance industry. When that changes, I'll do it however it can be best done at that time.

As of now, its game over... there is no competition.

Cheers,
Dave Donhoff
Leverage Planner

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71536 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 1:11 PM
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The "right" conclusion seems so simple to me: either you want to do battle yourself in the stock market, fully exposed and taking the risk of getting slaughtered...or you don't.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71538 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 4:20 PM
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BTW, the highest cap there is in California--16% annual point to point to blended index strategy--is offered by Allianz. One thing to remember when one is comparing IULs is that not every IUL is offered in every state. IUL with a cap higher than 16% may be for IULs in other states.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71542 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/28/2013 5:14 PM
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Insurance companies...financial stability is rated by AM Best.

The financial stability of insurance companies is also rated by Standard & Poor's, Moody's and Fitch. Company ratings are usually fairly consistent among the agencies but not always.

An example of various companies and their ratings can be found here: http://www.ubsnet.com/pdfs/Carrier%20Ratings.pdf

(Please note that this link was just the first one I found on a quick google search that is an example of ratings for various companies along with a quick explanation of the various letter grades, and should not be seen as any type of endorsement or critique or any type of comment on the companies listed in the pdf or any of their product offerings. Also note that there are many other insurance companies who are not listed on the pdf)

Full disclosure - I am an employee of an insurance company (one that is not listed on the attached pdf)

-synchronicity

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71556 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 5:20 PM
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I came back to this thread to see if there was further discussion. I now note that the person who attacked IULs got a mess o' recs. I ask myself, "Why the disparity of recs?"

Dave's posts nailed both the math and the logic of IULs. He hit the advantages of IULs front and center, yet those who would rather venture forth in the market, for possibly a few more yield points, without any protection, fully risking their retirement in some cases, are hailed greatly.

All Rayvt's posts proved is that if you duke it out by yourself in the stock market, commit to do so for many years and hope your timing is consistently impeccable, you may (not will) earn a bit more than an IUL. But if/when you die, that's all your Estate gets--which, by the way, your heirs WILL pay taxes on, unlike the proceeds of an IUL, which pass to your heirs tax free.

Other than obviously Rayvt cannot STAND the thought that someone may earn a commission from the sale of a life insurance policy wrapped around a mutual fund, I don't understand the hostility toward IULs--which hostility, by the way, exists in the general population, if discussion boards like this are any indication.

All I can conclude is there's religion in financial matters just as there's religion in other matters, and if your religion is that you're a stock picking warrior, impervious to risk, your ego won't let you consider any other course of action.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71562 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 8:24 PM
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:: sigh ::
CC you are much too emotional about this.

Letting your emotions control your investing is well-known to be detrimental to your investment success. Someone who is driven by their emotions is far better off in some fire-and-forget strategy. So for them perhaps a IUL is the least-bad method.

From my quotes file: "Following the path of least emotional discomfort is a road to failure."

the person who attacked IULs got a mess o' recs. I ask myself, "Why the disparity of recs?"
1) Nobody "attacked" IULs. Laying out mathmatical and statistical facts is not an attack. Making a rational argument about a thing being sub-optimal is not an attack.
2) The disparity of rec's might be telling you something. If umpteen people are saying that strategy X is not good, but you are thinking it is good, maybe you should try to understand *why* they think it's not. In particular, if people in the top 2%-3% of net worth ( plug yours in here to see where you are: http://politicalcalculations.blogspot.com/2013/01/the-distri... ) are generally saying strategy X is not good, then their opinion probably has a bit of weight.

If you google "problems with index universal life" you'll get a variety of information -- some is garbage, but most are not.

As a general rule, whenever you are considering ANY investment strategy, the first thing to do is to google "problems with [strategy]", so you don't get suckered in by just hearing from the proponents.

Dave's posts nailed both the math and the logic of IULs. He hit the advantages of IULs front and center,
But he didn't discuss any DISadvantages of IULs. Every story looks good if you leave off the part about "and then you die."

Anyway, I have to chuckle at your comment. I got a private email from someone who has been around TMF for 10+ years, who wanted to stay private .... who said in part "Just wanted to say THANK YOU for your efforts to shoot down Dave and Cath Coy on their promotion of Indexed UL. Their comments run from disingenuous (Dave) to ignorant (CathCoy)."

Notice that Dave and I completely disagree on IULs, but he doesn't get all emotional about it. As for CC, on the other hand, I don't think is ignorant (that's a bit too strong, IMHO), but is mostly way too emotionally committed and is more deluded than ignorant.

yet those who would rather venture forth in the market, for possibly a few more yield points, without any protection, fully risking their retirement in some cases, are hailed greatly.
:: sigh :: You have NO IDEA. You prize safety and stability above all else. Got it.
There are a lot lot lot of people who are regulars on TMF boards who have retired in their 50's --well before 65-- by venturing forth in the market. I'd say that darned few of them have any money at all in an IUL or other similar vehicle -- and that if they do, it's only a very small amount of their net worth.

Elsewhere, I have relayed that I have had a 50% loss twice in my career. Yup. Two different times our accounts lost half their value. That would have you spitting up blood.
OTOH, we're currently slightly above our all-time high in net portfolio value.

All Rayvt's posts proved is that if you duke it out by yourself in the stock market, commit to do so for many years and hope your timing is consistently impeccable, you may (not will) earn a bit more than an IUL.
Um, my timing has been horribly off. See above, re: the 2 times we lost half our money.
Have you looked at the equity curve charts I uploaded? The actual historical data since 1987?
$75,000 is more than "a bit" more than $50,000. And that's not even deducting the various fees and mortality charges that a real IUL would face.

Or, well, 1987 to 2000. At the peak of the dot-com boom, $66,000 for S&P vs. $25,000.
'course, there was the subsequent dom-com bust. $40,000 for S&p vs. $27,000. You were "protected" from that loss at the cost of $13,000. Some protection.

I will grant that it looks different for somebody who started in Jan 2000 at the peak just before the bust. $14,000 for the S&P vs. $24,000 for IUL. Better not wait until 13 years before retirement to start investing for retirement. ;-)

Oh, you're wrong about "when you die, ... your heirs WILL pay taxes". They won't. The basis gets reset upon death, so no capgain tax. Or did you mean estate taxes? I am ignorant about that, the exclusion is pretty high, so I don't worry about it. [Ah, the 2013 exclusion is $5,250,000. I don't think many IULs are going to have a value of $5 million, so no worry.]

obviously Rayvt cannot STAND the thought that someone may earn a commission from the sale of a life insurance policy wrapped around a mutual fund,
I could care less about commissions. Everybody's got to eat. If a person provides a beneficial service, they earn their commission. If not, not.


I don't understand the hostility toward IULs
This much is clear. ;-)

--which hostility, by the way, exists in the general population, if discussion boards like this are any indication.
There is also a general hostility to spit sandwiches. Maybe, just maybe there's a good reason for the hostility?

All I can conclude is there's religion in financial matters just as there's religion in other matters, and if your religion is that you're a stock picking warrior, impervious to risk, your ego won't let you consider any other course of action.
By jove, I think she's got it!

Although, the "religion" and emotionalism and ego is on your part, not on the anti side.

Look, this isn't hard. Math doesn't lie. The historical data is readily available.
I put up the equity curve charts. I was as fair as I could be. I used the actual S&P500 data, and used the exact floor & cap rules and figures that you and Dave said. 0% floor, 12% annual point-to-point cap.
What I *didn't* do was subtract the fees & mortality fees that a real IUL would have -- which means that the equity curve I showed for IUL is HIGHER than it would actually be in real life.

I challenge the IUL proponents to do the same. Run the data and post the equity curves. If you really want to go wild, post the stats like they do for real investment strategies: CAGR, standard deviation, maxdrawdown, sharpe ratio, etc.

So far, all I've seen is handwaving. You don't prove or demonstrate that IULs are better than the S&P500 by handwaving, you do it by shwoing the data. SHOW ME THE MONEY.

Yes, I get that IULs have a guaranteed floor and you never ever lose money. For some people, that's the #1 most important thing. I get that. You don't mind that you'll only have half the money when you retire -- just that you never see your account value ever go down. I get that.
See you at Walmart -- I'll be the guy that you hand the cart to.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71563 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 8:36 PM
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CC you are much too emotional about this. Letting your emotions control your investing is well-known to be detrimental to your investment success. Someone who is driven by their emotions is far better off in some fire-and-forget strategy. So for them perhaps a IUL is the least-bad method.

It appears YOU are the emotional one, Rayvt. What else can be said about someone who INSISTS that EVERYONE follow HIS path to financial success. Oh, that's right...I forgot you're a librul. 'Nuff said.

An IUL is suitable for many people, but you won't admit that. You INSIST that EVERYONE accept what YOU say about them, without acknowledging their many positive attributes.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71564 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 8:38 PM
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One more thing (,he said in his best Columbo voice):

It would perhaps be interesting for me to re-run my spreadsheet with the actual fees and charges (and bonuses??) that are there in an actual IUL contract.

I'm not about to try to dig those figures out myself, though. If someone authoritative (looking at you, Dave) wants to provide those figures, I'll put it in.

I could even make a spreadsheet using the raw S&P500 index, which goes back to 1950 --- but for which I don't have dividend history of -- and dividends are hugely important.

It might perhaps also be interesting to run it for making periodic deposits rather than just one lump sum at the beginning.

OTOH, if nobody wants to see more accurate figures & charts, I completely understand.

Ahhhhhh ---- it's great to be retired and have more free time than you know what to do with.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71565 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 8:38 PM
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Elsewhere, I have relayed that I have had a 50% loss twice in my career. Yup. Two different times our accounts lost half their value.

If you're fine with losing half your fortune not once but twice, that's fine with me. Idiotic, but fine with me.

BTW, if Warren Buffett had followed the herd, as you suggest is the smart thing to do, he wouldn't be a bazillionair today.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71566 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 8:43 PM
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Hey Ray,

I challenge the IUL proponents to do the same. Run the data and post the equity curves. So far, all I've seen is handwaving. You don't prove or demonstrate that IULs are better than the S&P500 by handwaving, you do it by shwoing the data. SHOW ME THE MONEY.

Happy to do so on a strictly apples-to-apples financial performance basis. Since it is impossible for you to guarantee that any strategy you design will avoid have consecutive drawdown periods during your eventual retirement distribution years, you can structure anyway you want as long as it delivers zero annual drawdown risk, and I'll do the same.

Name your start year & end year... minimum 20 years (but longer if you want, your call.) Heck, you can cherry pick the specific start/end dates if you want to.

I'm totally up for this (with the eyes-open awareness that there *ARE* a handful of periods that an IUL might not win.)

Let's look at both with, and without trading or product costs. Of course, mine will come burdened with the requisite death benefits, but you can do it without the mortality cost burdens... I'll give it to you as a 'handicap.'


Yes, I get that IULs have a guaranteed floor and you never ever lose money. For some people, that's the #1 most important thing. I get that. You don't mind that you'll only have half the money when you retire -- just that you never see your account value ever go down. I get that.
Its the naked buy & holder who's at risk of having an account 50% of what they might have in a principal-guaranteed strategy (which, again, *CAN* be done without the insurance industry, just not anywhere as cheaply.)

Are you willing to put up? Or was your 'hand waving' comment simply self-referential? ;~)

Dave Donhoff
Leverage Planner

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71567 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 9:29 PM
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You don't mind that you'll only have half the money when you retire -- just that you never see your account value ever go down.

Patently false. Shame on you. Stop lying.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71568 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 11:41 PM
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Patently false. Shame on you. Stop lying.
LOL!!! Leave FMNH out of this, its *wayyyy* above his pay grade ;~)

I trust Ray to dig deep & do his best... after all, he's retired with time on his hands for such financial challenge exercises ;~)

Dave

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71569 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 11:42 PM
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It appears YOU are the emotional one, Rayvt. What else can be said about someone who INSISTS that EVERYONE follow HIS path to financial success.

Too funny for words!
I've never said anything about how I invest, nor have I urged people to invest a certain way. All I've said is that IULs are not a good investment vehicle -- and posted data to demonstrate such.

If you're fine with losing half your fortune not once but twice, that's fine with me. Idiotic, but fine with me.
I guess you must have missed the part where a simplistic buy-and-hold of the S&P500 has a final value of $76,000 whereas the S&P500 invested by the IUL floor/cap rules had a final value of $51,000.

So I guess an B&H'er is idiotic even though he ends up with $25,000 more money? In what sense is that idiotic? Don't look now, but that idiot has 50% more money.

An IUL is suitable for many people, but you won't admit that.
Hmmm, I guess you didn't read everything I wrote. TL;DR?
'cause I said, actually, that a IUL *is* suitable for some people. People who prefer never-declining values over having more money. People who cannot stomach any volatility or drawdown.

You INSIST that EVERYONE accept what YOU say about them,
Facts are stubborn things. Math doesn't lie. I just showed the data. In fact, I asked people to show me where I was wrong.

In finances, it's all about the money. A strategy that gets you more money is good. A strategy that gets you less money is bad. We all make mistakes. If I am making a mistake and thinking that a strategy is good when it is really bad, then I want to know, so I can stop doing the bad strategy.

It's happened to me a bunch of times in my investment lifetime. More than once somebody has told me, "No. That's a stupid strategy." And showed me where I was wrong.
Believe it or not, I am GREATFUL when somebody shows me that I'm wrong about a strategy. 'cause -- look up above -- making more money is good, making less money is bad.

===============================
I generated this chart the other day but declined to post it so as to not muddy the waters. But what the heck.
http://i1131.photobucket.com/albums/m543/rayvt/Equitycurves1...

That chart has two additional simple timing overlays on the S&P500.
One is timed with the 10-month Simple Moving Average, the other is timed with the 7-month-lookback Relative Strength. These are VERY simplistic and not ones that I use myself.

You can see that they both dramatically lower the volatility and drawdowns (losses) of the S&P, and they still have a higher final value than the IUL.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71570 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/29/2013 11:54 PM
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Hi Ray,

'cause I said, actually, that a IUL *is* suitable for some people. People who prefer never-declining values over having more money.

That's half-correct. Its for people who prefer to ELIMINATE the catastrophic probabilities of having less money with no further time to recover.

You can see that they both dramatically lower the volatility and drawdowns (losses) of the S&P, and they still have a higher final value than the IUL.

So, is that really your system submission? Buy & hold the S&P (including dividends, for you but not for me, oh of course,) from the stipulated 4/13/1987 date to the final 4/13/2012 date? Unhedged, naked?

Shall I proceed on that submission?

Believe it or not, I am GREATFUL when somebody shows me that I'm wrong about a strategy. 'cause -- look up above -- making more money is good, making less money is bad.

Let's make you very happy & grateful (or even greatful) then! *YOU* can buy the beers when we eventually get the privilege of meeting in person.

Dave Donhoff
Leverage Planner

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71571 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 12:53 AM
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Let's make you very happy & grateful (or even greatful) then! *YOU* can buy the beers when we eventually get the privilege of meeting in person.

Oooh, can't wait. Can I come, too?

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71572 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 12:57 AM
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Happy to do so on a strictly apples-to-apples financial performance basis. Since it is impossible for you to guarantee that any strategy you design will avoid have consecutive drawdown periods during your eventual retirement distribution years, you can structure anyway you want as long as it delivers zero annual drawdown risk, and I'll do the same.

I'm totally up for this (with the eyes-open awareness that there *ARE* a handful of periods that an IUL might not win.)


I wasn't asking for a p*ssing contest. This is not a mano-a-mano contest. (I suspect that mano-a-mano, most of the long-timers on the Mechanical Investing board would skunk you.) There's no gotcha's involved.

It's an investigation to see what the data is. Approach it as, "We have 2 proposed strategies, let's see how they compare when applied to historical data." Final value, of course, isn't everything. Things like volatility and drawdown need to be considered.
Different people will place different importance on different aspects. Some people (like CC) demand no drawdown ever. Some people are okay with large drawdowns as long as the total return is high. Some people are okay with moderate drawdowns as long as the risk-adjusted return is adequate.

I'm interested in applying the IUL rules & costs (whatever they accurately are) to the actual historical S&P500. I can get the price data (but not dividend data) going back to 1950. That's probably too far to reasonably go back, so let's start at Jan 1965 to Dec 2012. Eyeballing a chart, it looks like the yields varied between 4% and 1.5%, with an average of around 2.75%, so I'd just hardcode 2.75% yield.

Really, my "challenge" was more along the lines of: you tell me what the periodic costs, fees, and bonuses, floor/cap rules are which would emulate the way an IUL would work. We already know that IULs don't credit you with dividends, just with the raw price change in the index.
Provided that there's nothing too wierd or too complicated for me to do in an excel spreadsheet, as long as we get the major items close -- then I'll model it in excel and apply all those rules to the historical S&P data. And we'll see where the data takes us.

For example, I read something last night about some IULs having a "no loss over a 5-year period" rather than "no loss in any 12-month anniversary period". That's too complex for me to model -- and anyway I bet that it's to the detriment of the IUL holder -- there's no was the insurance company would introduce that sort of complexity unless it benefitted them.

you can structure anyway you want as long as it delivers zero annual drawdown risk
Nope. Not a p*ssing contest. I am completely uninterested in developing a strategy that mimics what a IUL does.
Anyway, if it *was* such a contest, I wouldn't allow you to introduce such a rule, any more than you would allow me to make a rule like "no cap on gains".


Actually, the thing that got me interested in working on the data was the bit about gains being capped at 12% (or whatever). The implication is that this doesn't happen very much, so it doesn't cost you very much (cost as in "foregone gains"). Everybody tends to think that it doesn't happen much. But being data-driven, I had to ask myself, "So, okay, how often DOES it happen? How often do you hit the cap, and how often is the gain way higher than the cap?"

And the answer is "Surprisingly often."
35% of the rolling 12-month periods have a return more than 12%.
13% of the periods are more than 20%.
You hit the cap a lot, and you miss out on a lot of VERY LARGE gains.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71573 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 1:31 AM
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I wasn't asking for a p*ssing contest. This is not a mano-a-mano contest.
I'm not signing up for a p*ssing contest, and "mano a mano" sounds violent... no interest.

(I suspect that mano-a-mano, most of the long-timers on the Mechanical Investing board would skunk you.) There's no gotcha's involved.
Who? Would they have the stones to step up to an apples-to-apples performance comparison?

Comparing apples to organutans is rather pointless. I have great systems to outperform the S&P if I am free to take drawdowns... why bother, that's not a challenge.


It's an investigation to see what the data is. Approach it as, "We have 2 proposed strategies, let's see how they compare when applied to historical data." Final value, of course, isn't everything. Things like volatility and drawdown need to be considered.
If there is no constraint on drawdowns, there is no point. If you want to compare a rules-based trading system, define your maximum drawdown and we can go from there.

If you want to compete against an IUL, the definition is zero.

I'm interested in applying the IUL rules & costs (whatever they accurately are) to the actual historical S&P500.
Here's a simple crediting method rule set;
0 floor each anniversary,
12% cap each anniversary,
Reset each anniversary,
1% total annual cost burden over 20 years, (70 bips by 30 years,)


Really, my "challenge" was more along the lines of: you tell me what the periodic costs, fees, and bonuses, floor/cap rules are which would emulate the way an IUL would work. We already know that IULs don't credit you with dividends, just with the raw price change in the index.
You got it, knock yourself out.

For example, I read something last night about some IULs having a "no loss over a 5-year period" rather than "no loss in any 12-month anniversary period". That's too complex for me to model -- and anyway I bet that it's to the detriment of the IUL holder -- there's no was the insurance company would introduce that sort of complexity unless it benefitted them.
You're too cynical... what it actually does is skew the growth distribition towards different market types. Some methods perform better in extended bull market rallies, some better in channeling markets, some better in persistent bears. None lose money, and in most cases you can adjust your declared method (or even allocate among various) at your own discretion.

You are correct though... the modeling requires pretty strong Excel skills.

Actually, the thing that got me interested in working on the data was the bit about gains being capped at 12% (or whatever). The implication is that this doesn't happen very much, so it doesn't cost you very much (cost as in "foregone gains").
That's an interesting assumption... but not accurate in my observation (that this is the common implication.)


35% of the rolling 12-month periods have a return more than 12%.
13% of the periods are more than 20%.
You hit the cap a lot, and you miss out on a lot of VERY LARGE gains.

Ahhh... but the vast majority of the grandslam rallies are *RECOVERY* rallies, *NOT* bull run extensions.

Losing out on a 50% gain means nothing when you didn't incur the previous 50% loss (and the IUL participates in the 1st 12% gain from the previous non-loss 0% position, so it can still be the overwhelming winner, even when it "lost" out on the rally.)

Play on... let's see what you come up with.
Dave Donhoff
Leverage Planner

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71574 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 2:08 AM
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Its for people who prefer to ELIMINATE the catastrophic probabilities of having less money with no further time to recover.

Yah. Valid concern.
We went to some "plate-licker" free dinners in 2001-2002 after the dot-com crash given by financial advisors looking for new clients. They related a number of sad stories of clients who retired in their 40's & 50's near the top, lost half of it, and then had to try to find another high-paying job. Don't retire on a shoe-string.

I don't know the sizes of the people you typically see. But if you have a $100K account and lose half, it doesn't matter. Neither 100K nor 50K is going to put you on easy street, or make a significant change in your life-style. (Or maybe it would -- perhaps I'm jaded.)

But if you have a $1,000,000 portfolio and lose half -- yeah that would hurt. But in the words of J.J. Astor, "A man who has a million dollars is as well off as if he were rich."
Does anybody have a $1,000,000 IUL? Did anybody with a $1M IUL account build it up from zero? Bet not.
I'd think that somebody who has a $1M account had built it up thru either massive income or built it up by smart investing. They aren't likely to put their entire liquid net worth in an IUL, so probably it they have a $1M IUL it's only half their NW, so they have $2M -- $1m in an IUL and $1M outside.

That's a $2m portfolio. If their portfolio gets cut in half, that's still $1M. Most people could survive on $1,000,000.

So, it seems to me that an IUL is functionally useless to somebody with a low net worth. The protection is useless because half of a low number is still just a low number.

Likewise, an IUL is redundant to somebody with a high net worth. Half of a very large number is still a very larger number. And anyway, as someone's wife said after the dot-com crash, "You built us up from $20,000 to $1,000,000. Just do the same thing and build us up from $500,000. Anyway, it's still $480,000 more than we started with. And anyway, we could live comfortably on $500K, just not luxuriously."

I think the sweet spot for something like IULs is in the midrange, where you have maybe $500K +/- $100K and don't want to risk having to start all over again with only half of it. You could probably squeek by with retiring on $600K, but $300K would be dicey.

So...the prime prospect is probably somebody who is 5-10 years from retirement with a liquid non-IRA, non-401K net worth of around $500K, and who is scared that he'll lose half of it and won't have enough time to re-build it back up. And he has to be okay with the fact that it will generally NOT grow very much once it's in the IUL, and be okay with the restictions on how much and how fast he can pull money out of the IUL. (And no smoke about taking a loan from the IUL. A loan is just a fancy withdrawal.)

Looking at my equity curve chart, with a $10K initial value ....
dropping from $66K to $40K in 2 years (2000-2002) hurts bad.
It took about 4 years to get back.
But it did.
And in 7 years from the 2000 peak, 5 years form the bottom, it got to $76K.
Not such as big catastrophe, is it? 6 years to get back to the previous peak.

And then the drop from $76K to $40K in 1 1/2 years (2008-2009).
It took 3 years to recover back to $76K.
A little under 5 years to get back to the previous peak.
Not such as big catastrophe, is it?

Maybe to some people it is.

'course (new subject alert!), quite a few people _do_ think it is. I know that because I see the money outflow from stocks and flowing into bonds. Bonds which are going to get absolutely *crushed* when interest rates begin to go up.
People who invest with their fearful emotions are gonna get hammered because they can't stand the volatility of stocks. These people would be better served by moving their money into IULs. But I bet they aren't. Scratch that. I know they aren't. The money is flowing into bonds.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71575 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 2:28 AM
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Let's make you very happy & grateful (or even greatful) then! *YOU* can buy the beers when we eventually get the privilege of meeting in person.

Looking forward to it.

Give me a buzz next time you plan to be in the Little Rock/Hot Springs area. I'll even pick you up from the airport. We've got about 30 great barbeque places within an hour of my house, so I'll even spot you a meal or two.

True story: We stopped at a roadside BBQ trailer on the way back from church one day. His smoker was going and it smelled GREAT. He said, I've got a brisket that just came out of the smoker. We wanted ribs, and he said, Sorry, don't have any ribs right now, but I've got some ribs that are almost ready to come out. So we said, "Okay, how long? If it's not too long we'll just wait a bit." He said, "Pretty soon. They'll be done in about 2 hours."

Smokin' In Style has not only great BBQ but $3 pitchers of beer. For $10 you can burp beer and hickory smoke for 2 days. ;-)
Beer is $1.50 and soda is $1.85, so you see where Arkansasan's priorities are!


Yes, to un-named email person, we moved from Algonquin, Il to Hot Springs, AR. No more shoveling 3 feet of snow that fell overnight. When we get a blizzard here, we have to wait until almost noon the next day for the sun to melt the entire 1/4 inch.

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71576 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 3:14 AM
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Who? Would they have the stones to step up to an apples-to-apples performance comparison?

Comparing apples to organutans is rather pointless. I have great systems to outperform the S&P if I am free to take drawdowns... why bother, that's not a challenge.


If I may back up a bit, this debate arose over the claim that IUL provide "market returns without market risk." (or something very close to that statement). That's the question that kicked this whole thing off. I'd like to return to that question, because it is a good one.

If we are going to evaluate that claim, then we have to look at how a IUL performed vs. "the market." For purposes of this discussion, it appears to me people have been assuming the market is the S&P 500 index. I think that is a reasonable assumption. One other assumption is that we are looking at retirement time horizons. Twenty years, something like that. The OP was looking to do this instead of his 401(K), so those assumptions seem reasonable to me.

Ray showed pretty convincingly that IULs don't outperform "the market" over time. There are only two reasonable conclusions from those data:

1) Ray's backtest was in error
2) The original claim was bogus

Since the IUL proponents haven't pointed out any errors in Ray's methodology, 2) becomes the most likely explanation. Obviously, that means IUL underperforms over retirement time horizons.

Now the conversation has shifted to something like "find something better than a IUL." But the original question is still with us. Do IULs provide market returns without market risk? AFAIK, the answer to that question is no. And none of the IUL proponents have tried to step up and show the answer is yes.

If the question was "show me a condition where IULs are awesome" I'm sure we could all come up with some examples. But that wasn't the main question. And if we can't figure out the answers to the big questions, the niche conditions are meaningless.

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Author: gdett2 Big red star, 1000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71577 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 3:18 AM
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Ray,

Does anybody have a $1,000,000 IUL?

I have a partial answer for you. I have several friends that could be in this category and higher. I was trying to pinch them for some endowment donations recently and I talked with some of them about investing styles. I also asked if they had heard of IUL policies because of the last thread on them here. 4 said yes and had IULs pitched to them by an agent. None were interested. Why?

It caps their upside because of the high internal expenses. It makes the people that hawk these things rich, not the buyer of the policy.

The reason we have money is we were willing to risk it. We give it to good charities but none want to waste it on fear. We prepare for bad times since we know they will come.

None of the above are silver spoon people. They worked hard for what they have. Not a single one is going to give a bunch of their money to an insurance company for no real benefit. They insure their homes, buildings, equipment, health, life, etc for protection.

This discussion about losing 50% in retirement and being crushed by taking withdrawals during depressed market conditions is garbage if you plan ahead. If a person invests 100% in stocks or the S&P500 with no adequate cash/near-cash cushion to carry them through the rough spots, it isn't the fault of the market or their broker. That is just simple Planning 100, not even a true college level course.

Gene

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71578 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 3:28 AM
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Elsewhere, I have relayed that I have had a 50% loss twice in my career. Yup. Two different times our accounts lost half their value.

If you're fine with losing half your fortune not once but twice, that's fine with me. Idiotic, but fine with me.

BTW, if Warren Buffett had followed the herd, as you suggest is the smart thing to do, he wouldn't be a bazillionair today.


I dunno. Back in 2009 BRK fell to very close to 50% off the previous high. Then it did nothing for a while, then at the end of 2012 it went on a tear which took it to a new high.

In this example, you wouldn't have taken the loss. But you would have been capped out in both of the last two years, so you'd be money behind. BRK is a perfect example why people are skeptical of this strategy.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71579 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 2:16 PM
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I don't know the sizes of the [bank accounts of the] people you typically see. But if you have a $100K account and lose half, it doesn't matter.

It doesn't? Why's that?

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71580 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 3:11 PM
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sykesix wrote: If I may back up a bit, this debate arose over the claim that IUL provide "market returns without market risk." (or something very close to that statement). That's the question that kicked this whole thing off. [...] If we are going to evaluate that claim, then we have to look at how a IUL performed vs. "the market." For purposes of this discussion, it appears to me people have been assuming the market is the S&P 500 index. I think that is a reasonable assumption. One other assumption is that we are looking at retirement time horizons. Twenty years, something like that. The OP was looking to do this instead of his 401(K), so those assumptions seem reasonable to me. [...]

sykesix's parameters are as good a starting point as any. No one claimed that an IUL would perform as well as ANY/EVERY stock market strategy. No one said one could find the most blazingest trader out there--a consistent annual winner, if such a person exists--and say that an IUL will match his/her performance, so let's just take that off the table. So...

~ Self-traded S&P 500 vs. IUL (with 12% cap)
~ January 1975 (age 28) to December 2012 (age 65) [37 years of systematic contributions]
~ Monthly investment amount: $1,000 (round number)

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71581 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 3:13 PM
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I don't know the sizes of the [bank accounts of the] people you typically see. But if you have a $100K account and lose half, it doesn't matter.

It doesn't? Why's that?


Because $100K isn't enough to fund a retirement. If you don't have enough to retire on, then half of that is also not enough to retire on. So there is no difference--either way, it's not enough to retire on. That seems to be self-evident.

Another way to put it: Using the standard rule of withdrawing 4% of your portfolio per year in retirement, 4% of $100K is $4000/yr.
Half that is $2000/yr.

Unless somebody is living in a refrigerator box and eating from dumpsters, an extra $2000 a year is not going to make any difference in their life-style.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71582 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 3:43 PM
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Because $100K isn't enough to fund a retirement.

It's still a pretty steep loss. I guess, using your criteria, it's a piffle.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71583 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 6:34 PM
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Because $100K isn't enough to fund a retirement.

It's still a pretty steep loss. I guess, using your criteria, it's a piffle.


I just don't understand where you are coming from. It's frustrating -- I don't know of you are being willfully obtuse and yanking my chain, or if you truly just don't get it.

Let me try to explain it another way.
Scratch that. If you don't get that a difference of $50,000 in somebody's net worth when they retire is not going to make any difference in their life-style, then it's just wasting my time. Life's too short.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71584 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 7:08 PM
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Okay, annual 0% floor, 12% cap.
Index is S&P500 including constant dividend yield of 2.75%, Jan 1975 thru Dec 2012.
One time initial deposit of $10,000. (Doesn't matter, just scale up to whatever you want.)

Annual fees are fixed at 1%. I'm not sure how to apply the fee, though. Google didn't come up with anything the explained the details.

Is it subtracted from the return? That would mean the true floor is -1% and the true cap is 11%.
So if the prior account value was $1,000 and the index gained 10%, the new value would be $1,000 at a gain of 9% = $1090

Or do you subtract the fee from the previous account value and then apply the credit?
That would be $1000 - 1% = $990 and then a gain of 10% to get $1089.
It's only a small difference, but might as well be as accurate as possible.

I can't really do a stepped fee, where the fee is X% for some number of years and then Y% thereafter. What I found with google indicated that the mortality charges increase as you get older, so that would mean that the fee goes UP as the years go by. Makes me dizzy.
So what figure should I use that is constant for the entire 37 year period? 1.00? 0.75%?

Periodic deposits are a bit harder to do, but not impossible. I assume the gains & fees apply to the prior balance, and then the new deposit is added in, right? $10,000 initial and then $1200/yr.
Oh, heck, I just thought --- it's actually real easy to do, I've just never done it because I don't normally model that way.

I'm setting up the spreadsheet so that all these things are parameters so they'll be easy to change.

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71585 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 7:36 PM
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I can't really do a stepped fee, where the fee is X% for some number of years and then Y% thereafter. What I found with google indicated that the mortality charges increase as you get older, so that would mean that the fee goes UP as the years go by. Makes me dizzy.
So what figure should I use that is constant for the entire 37 year period? 1.00? 0.75%?


?? if you're doing a spreadsheet you should be able to
set different fee each year, no?

deciding whAt they are and exactly how applied ...

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71586 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 7:42 PM
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Let me try to explain it another way.
Scratch that. If you don't get that a difference of $50,000 in somebody's net worth when they retire is not going to make any difference in their life-style, then it's just wasting my time. Life's too short.


put another way,
50k, 4% SWR, about 150/mo

if ones pay we're cut 150/mo, how would
life change?

I think not much (agree with you)

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Author: MurrayS Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71587 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 9:51 PM
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IMHO, a 1% annual fee is pretty low and I believe it should be taken off the total account value each year. That's been my experience with financial advisors.

-murray

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71588 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 11:32 PM
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Let me try to explain it another way. Scratch that. If you don't get that a difference of $50,000 in somebody's net worth when they retire is not going to make any difference in their life-style, then it's just wasting my time. Life's too short.

Oh, now that's their entire net worth, according to you, so poor is poor. Well, then, you're right, a fifty thousand dollar loss is nuthin' since they're going to be eating cat food, anyway.

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71589 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/30/2013 11:35 PM
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Rayvt wrote: Yes, to un-named email person,

Yet you posted MY email name, just to, I suppose, show what a snot you are. Duly noted.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71590 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 12:04 AM
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Hi Ray,

I don't know the sizes of the people you typically see. But if you have a $100K account and lose half, it doesn't matter. Neither 100K nor 50K is going to put you on easy street, or make a significant change in your life-style. (Or maybe it would -- perhaps I'm jaded.)
Its all relative to your net worth, not any particular account size. If $100k is all you have in the world, a 50% haircut is devastating.

Does anybody have a $1,000,000 IUL? Did anybody with a $1M IUL account build it up from zero? Bet not.
Nobody builds up a $1M account from zero on returns, everybody has to make savings contributions, regardless if its in a hedged or naked account.

So, it seems to me that an IUL is functionally useless to somebody with a low net worth. The protection is useless because half of a low number is still just a low number.
Actually, its the exact inverse. Only those who have enough money that they can afford to lose 50% and not have it affect their desired lifestyle can afford to take the risks of substantial drawdowns.

That's a very fine & rare number of folks.

Looking at my equity curve chart, with a $10K initial value ....
dropping from $66K to $40K in 2 years (2000-2002) hurts bad.
It took about 4 years to get back.
But it did.

If 1,000 people ran this plan, statistically how many would get trapped into selling/liquidating during the drawdown? I don't know the statistical answer, but the risks are significantly greater than most people are comfortable with when they are aware of the danger.

And in 7 years from the 2000 peak, 5 years form the bottom, it got to $76K.
Not such as big catastrophe, is it? 6 years to get back to the previous peak.

If you're among the lucky, its OK.

And then the drop from $76K to $40K in 1 1/2 years (2008-2009).
It took 3 years to recover back to $76K.
A little under 5 years to get back to the previous peak.
Not such as big catastrophe, is it?

Again, for those remaining standing, all is hunky dory.

=========================
Hi Sykesix,

Ray showed pretty convincingly that IULs don't outperform "the market" over time.

Anyone who was 'convinced' didn't pay attention.

There are only two reasonable conclusions from those data:
1) Ray's backtest was in error
Right
2) The original claim was bogus Nope

Since the IUL proponents haven't pointed out any errors in Ray's methodology,
I did, Ray's test fail to apply in sequence, as I previously explained.
When distributions are added to the effect, ignoring sequence quickly becomes not just underperforming, but catastrophic.

Do IULs provide market returns without market risk? AFAIK, the answer to that question is no. And none of the IUL proponents have tried to step up and show the answer is yes.

I have done so at least thrice;
Once in a prior thread, then linking to it twice more in this thread at posts;
71522
71517

=========================

Gene,

4 said yes and had IULs pitched to them by an agent. None were interested. Why?
It caps their upside because of the high internal expenses.

That may indeed have been the understanding that drove their decision, but very simply, they are wrong.

You can't get a zero drawdown strategy that captures 12-17% of a broad or blended market index for 1% outside the IUL products... at least not at present.


The reason we have money is we were willing to risk it

THIS... is a *SUPER KEY PHRASE*... and frankly, a massive fallacy.
The most successful investors take very very little risk. 'Unfair advantages' is the name of the game, for high net worths.

=========================

Ray,

Okay, annual 0% floor, 12% cap.
Index is S&P500 including constant dividend yield of 2.75%, Jan 1975 thru Dec 2012.
One time initial deposit of $10,000. (Doesn't matter, just scale up to whatever you want.)
Annual fees are fixed at 1%. I'm not sure how to apply the fee, though. Google didn't come up with anything the explained the details.


Its subtracted from the balance, then the credit is applied (same as any other investment fees, AFAIK.) But the fee figure will be lower on a 37 year build... read on.

What I found with google indicated that the mortality charges increase as you get older, so that would mean that the fee goes UP as the years go by.
No, the mortality costs per thousand of death benefit go up, but the amount of actual death benefit at risk drops faster, so the effect is a decreasing internal burden on capital.

So what figure should I use that is constant for the entire 37 year period? 1.00? 0.75%?
On a 37 year build, I believe i will be down around 50 bips, all inclusive... but for now let's run it 75, and we can adjust after I run my side (since yours is just one field in the spreadsheet.)

What I will do is run a forward projection for 37 years to determine the average annual internal burden, and then run the S&P from '75 through 2012 with the floor & caps with the handicap of the total internal fees.

I'm setting up the spreadsheet so that all these things are parameters so they'll be easy to change
Sounds good... I'm happy to help with Excel bits from my end as you build.

ONE MORE THING; Our OP asked about this as a retirement plan, which by definition requires distributions. Let's run distributions the last 10 years, down to full draw (zero out the account.) Ignoring what other offsetting income streams he may have, let's just make the 10 year distribution even each year. That way we'll have the full performance profile.

You can just pull the dough cost and tax free (you are assuming a ROTH, right?)
I'll pull it with a 5.3% additional interest burden, since I'll use policy loans to keep my tax free status.

Fair 'nuff?

Dave Donhoff
Leverage Planner

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71591 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 12:42 AM
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the mortality costs per thousand of death benefit go up, but the amount of actual death benefit at risk drops faster, so the effect is a decreasing internal burden on capital.

That would depend on the age of the insured, the amount of death benefit opted for relative to premium payments, and the credited return rate on the cash value, correct? (That last item is largely but not entirely dependent on the changes in value of the S&P index as per the terms of the contract on an IUL product, which is where most of the debate in this thread is occurring)

-synchronicity

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71594 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 2:51 AM
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Why can't you use the simplest criteria?

~ Self-traded S&P 500 vs. IUL (with 12% cap)
~ January 1975 (age 28) to December 2012 (age 65) [37 years of systematic contributions]
~ Monthly contribution: $1,000
~ $10,000 initial contribution
~ Annual point to point

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71595 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 9:53 AM
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Hi Synchronicity,

That would depend on the age of the insured, the amount of death benefit opted for relative to premium payments, and the credited return rate on the cash value, correct?

No, it doesn't depend on any of those. The factor you're looking for is the 'death benefit face design.' the choices are increasing, level, or decreasing (or a combination.) For our purposes we are designing for financial performance, with no intrinsic desire to maintain death benefit beyond the legal minimum.

Dave Donhoff
Leverage Planner

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Author: spinning Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71596 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 11:00 AM
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Yes, I get that IULs have a guaranteed floor and you never ever lose money. For some people, that's the #1 most important thing. I get that.

How does an IUL compare to other low-risk strategies, such as a ladder of FDIC insured CDs, or bonds?

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71597 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 11:38 AM
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For our purposes we are designing for financial performance, with no intrinsic desire to maintain death benefit beyond the legal minimum.

I get that you are discussing structuring a contract with as "thin" a death benefit as possible, but you still have increasing mortality expenses per $1,000 of death benefit as the individual ages and (as discussed at length on this thread) variability in the crediting rate on the cash value.

I'd be leery of making a blanket statement that the mortality costs are always going to be decreasing, but that may be due to overexposure to a compliance department. :-)

Carry on.

-synchronicity

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71598 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 12:22 PM
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Hi Spinning,

How does an IUL compare to other low-risk strategies, such as a ladder of FDIC insured CDs, or bonds?
I would expect insured CDs and unhedged bonds to underperform the hedged structure used inside an IUL... but if you can find historical data, maybe Ray can add a column (or ful worksheet) to consider the question.

==============

Hi Synchro,

I get that you are discussing structuring a contract with as "thin" a death benefit as possible, but you still have increasing mortality expenses per $1,000 of death benefit as the individual ages and (as discussed at length on this thread) variability in the crediting rate on the cash value.
I know the thread is long & scrolly... but the solution to your dilema is there;
As the mortality charges increase per dollar of death benefit, the required amount of death benefit decreases faster.

I'd be leery of making a blanket statement that the mortality costs are always going to be decreasing, but that may be due to overexposure to a compliance department. :-)
Not sure what you mean here.

Dave Donhoff
Leverage Planner

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71599 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 12:58 PM
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As the mortality charges increase per dollar of death benefit, the required amount of death benefit decreases faster.

My observations have been that that is not always the case. That having been said, if you assert that it is with the particular product(s) you are describing, who am I to disagree?

-synchronicity

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71601 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 1:39 PM
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Why can't you use the simplest criteria?

~ Self-traded S&P 500 vs. IUL (with 12% cap)
~ January 1975 (age 28) to December 2012 (age 65) [37 years of systematic contributions]
~ Monthly contribution: $1,000
~ $10,000 initial contribution
~ Annual point to point


If you change this to 3,000 quarterly or 12,000 annual, this should be relatively easy to do. However, I'd need to know exactly how you would think to apply the 12% cap (monthly, quarterly or annual).

Alternatively, I can just pull data and hand it over to Rayvt, who has a lot more time than I do.

-synchronicity

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Author: CCinOC Big funky green star, 20000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71603 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 3:32 PM
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If you change this to 3,000 quarterly or 12,000 annual, this should be relatively easy to do.

Why? Why can't a monthly contribution be used? That's how most people pay their insurance premium. A lot of people invest in stocks that way, too.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71604 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 3:37 PM
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Why?

Because getting monthly return data is more difficult (although I do have monthly total return data that could be used), but more importantly, you also would need to clarify how to properly apply the "12% annual cap" to contributions made during the year. I mentioned the latter issue in my earlier post.

-synchronicity

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71606 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 5:45 PM
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Because getting monthly return data is more difficult (although I do have monthly total return data that could be used), but more importantly, you also would need to clarify how to properly apply the "12% annual cap" to contributions made during the year. I mentioned the latter issue in my earlier post.

I found this website to be helpful:

http://www.hartfordinvestor.com/cs/Satellite?c=HLI01Product&...

Cliff notes: The fees are deducted from the premium prior to investing. The cap is for 12 months, but it is a rolling 12 month period. e.g. Oct-Oct is one period, Nov-Nov, the next period, and so on.

Interestingly enough, in this actual example you would have prevented losses in two segments and been capped out six times.

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71607 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 5:50 PM
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My spreadsheet, my rules. ;-)

There is no significant difference in statistical outcomes between annual (rolling 12-month periods) and monthly -- as long as everything is de-annualized properly.

IIRC, we already have determined that IULs use point-to-point annual periods on the policy anniversary date. That means that person A goes Jan-Jan and person B goes Feb-Feb. So every month is an anniversary. So to do it accurately we have to compute rolling 12-month periods.

And it's much easier to generate the data and charts using monthly figures (properly de-annualized) than using every rolling 12-month figures.

Anyway, it's a nit. Nobody cares about the comparative taste of different mud sandwich recipes.

Spinning off to a new thread ......

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71608 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 7:38 PM
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Hey Ray,

There is no significant difference in statistical outcomes between annual (rolling 12-month periods) and monthly -- as long as everything is de-annualized properly.
What does 'de-annualized' mean? How do you do that?

IIRC, we already have determined that IULs use point-to-point annual periods on the policy anniversary date. That means that person A goes Jan-Jan and person B goes Feb-Feb. So every month is an anniversary. So to do it accurately we have to compute rolling 12-month periods.
Some do, and that's what I had assumed we were going to use to compare.

And it's much easier to generate the data and charts using monthly figures (properly de-annualized) than using every rolling 12-month figures.
My understanding is we are going from 1/1/75 through 21/31/2012, yes?
• 27 years accumulation on an initial $10,000 lump sum, 10 years full distribution on an even payment annually.
• Each anniversary, the IUL records a 0% floor, 12% cap, minus the 37 year average internal fee burden (yet to be determined,) on the S&P500.
• The naked S&P buy & hold takes the real annual P&L on the face price, and adds 2.75% for dividends (yet to be confirmed as average,) and takes a 1% fee haircut each anniversary.
• (Which specific product are you intending to buy, by the way?)

Dave Donhoff
Leverage Planner

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71610 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 3/31/2013 11:23 PM
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Hey Dave,
I'm almost done. This is turning out to be a kinda fun investigation.

What does 'de-annualized' mean? How do you do that?
Convert an annual rate to the equivalent monthly rate. The inaccurate way is to divide by 12. (That's what credit cards and mortgages do.) It's close, but inaccurate. Since I've got a zillion spreadsheet that I used to backtest prospective strategies, I needed to be accurate, not merely "close".
This page shows the math: http://www.experiglot.com/2006/06/07/how-to-convert-from-an-...

My understanding is we are going from 1/1/75 through 21/31/2012, yes?
Yup. As soon as I figure out which month is "21". ;-)

You and CC have asked for slightly different things. Since I was clever enough to parameterize everything, it was easy to show several variations.

I intend to post the spreadsheet to Google Docs when I'm done. Then everybody who cares can d/l it and examine it and show me where I screwed up. And then run simulations with their own favorite parameters.

The naked S&P buy & hold takes the real annual P&L on the face price, and adds 2.75% for dividends (yet to be confirmed as average,) and takes a 1% fee haircut each anniversary.
Basically. Except I cut the yield to 2.25% in order to keep the chart from getting too big. And there is no haircut on the S&P. The E/R on VFINX is only 17 bps. The E/R on SPY is only 9 bps. There are other similar funds and ETFs and they all have very low E/R. We could simulate a higher E/R by adjusting the yield down -- but it doesn't make much difference; it doesn't change the relative results.

Taxes are a real-world consideration, but the effect is specific to each individual and circumstance. So you can't really account for taxes in a general purpose simulation.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 71612 of 75801
Subject: Re: 7702 Private Plans (indexed universal life) Date: 4/1/2013 12:35 AM
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Taxes are a real-world consideration, but the effect is specific to each individual and circumstance. So you can't really account for taxes in a general purpose simulation.
If you're only starting with $10k, any reason you wouldn't do it in a ROTH?

Dave

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