No. of Recommendations: 2
An IUL can immediately employ the equivalent of all the S&P account ... since it has zero market downside, and 90% liquidity at a positive arbitrage (borrow against it at 5.5% or less, while average net returns are 7.7%.)

You are confusing two scenarios. And thinking that a certain thing is a benefit when it is only a restructuring of form.

* When the market goes down, the IUL doesn't have a 7.7% return. It has a 0% return. (Yes, the S&P account has a negative return at that time.) And we know that the market has a loss 25% of the time (year-to-year).

* So 25% of the time the IUL return is zero.

* But the account fees are still charged.

* Any loan is charged interest (around 5.5%-6%), so in a down market you don't get any arbitrage, you get a gain of 0% and pay interest of 6%.

When you take money from the account, you are withdrawing money from the account, and the Net Value goes down by the amount of the draw. The form of the withdrawal -- whether loan or cash withdrawal -- does not change the substance.

I have to say that I doubt that you get the arbitrage. I'd have to look over the IUL contract very closely before I'd believe that. A loan against an IUL sounds similar to a loan against a 401-k. And every 401-k loan I've looked at excludes the loan balance when computing the gains.

Say you have $1,000,000 in an IUL, and you borrow out $900,000. The company says, "No problem, the index increases 12% this year, so we'll just give you $120,000 -- even though you only have a net account balance of $100,000." Unbelievable.

What is more likely -- and more believable -- is they'll say, "You get $12,000. 12% on $100,000."

Hmmmm. In a down market you hit the floor of 0%. So the company says, "No soup for you. 0% of anything is $0. And you owe us 6% of $900K or $54,000. We'll just take that out of your $100,000, so now your account value is $46,000. Oh, but you're not allowed to go above 90% LTV, so please wire us the $54,000 by tomorrow morning."

And you better hope that the next year isn't another down year, because you'll have to come up with *another* $54,000.

Leverage is fine when it works in your favor, but really SUCKS when things go bad and you get a margin call.
And it sucks even worse when the IRS sends you a letter explaining that you forgot to pay them income tax on that $900,000 distribution. Plus penalties.
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