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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 tradeoff.
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 dotcom bust and the 2008 financial meltdown.
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 20082009 bear market.
But ... $70K vs. $37K. $33,000 You pay a very hefty price for the comfort of a neverfalling value.



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