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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