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URL:  http://boards.fool.com/digging-deeper-into-the-data-i-believe-that-i-see-30709406.aspx

Subject:  Re: Hi gang... wow!!! Date:  5/31/2013  1:21 AM
Author:  Rayvt Number:  72329 of 75379

Digging deeper into the data, I believe that I see the reasons why the IUL underperforms a simple buy-and-hold long-term.
Data is S&P500 actual prices, 1950 to 2013, all rolling 1-year (12-month) periods.

1) The action of the floor and cap.
With no floor or cap the median annual return: 9.2%
With 0% floor, no cap: 10.4%
With no floor, 12% cap: 7.3%

The floor improved the return by 1.2% (10.4 - 9.2). This is the averted loss.
The cap cut the return by 1.9% (9.2 - 7.3). This is the foregone gain.

The cap hurts more than the floor helps. The cost of the cap is 1.9. The benefit of the floor is 1.2.
You're paying 1.9% but getting only 1.2% of benefit.

2) The IUL expenses/fees.
Median return, no Annual fee: 8.0%
Median return, 0.75% Annual fee: 7.2%
Median return, 1% Annual fee: 7.0%
Median return, 1.5% Annual fee: 6.4%
(All with 0% floor, 12% cap)

3) The exclusion of dividends.
To get an idea of the effect of dividends, consider this...
The median annual return of the S&P500 excluding dividends: 9.3%
The median annual return of the S&P500 with reinvested dividends: 12.4%

Over a 20 year period, this is a large monetary difference. Almost half of the total return is attributable to reinvested dividends.
At 12.4% $1,000 grows to $10,359. (w/divs)
At 9.3% to $5,921. (w/o divs)
At 7.0% to $3,870. (IUL @ 1% fees)

If an IUL did include dividends (on top of the 0%/12% floor&cap and 1% fee) the median annual return: 10.2%. This is adding the dividend after applying the floor/cap. If the dividend is added in and then the floor/cap applied, the return is significantly lower.
At 10.2% $1,000 grows to $6,976.

Of all these drags on performance, the largest is the exclusion of dividends. Over a long-ish period, that's an insurmountable headwind.
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