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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: of 17931  
Subject: Re: Hybrid Life Insurance Date: 2/18/2014 6:11 PM
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Hi jameshhunt,

Hopefully you're willing to accept some clarity on your assumptions;

Upside subject to changeable cap such as 13%, and ExCLUDES reinvestment of dividends.
No, dividends are included. Dividends determine the cap spread (how high the annual maximum gain cap is above the guaranteed floor cap. The dividends within the index determine the costs of the options spread used to capture the floor-to-ceiling market range.

Insurer has hedging costs.
Yep, but this is certainly not a negative relative to VULs and Whole Life, both of which have significantly higher M&E, marketing, base contract, and investment account expense charges.

Typically there are ten years of high expense charges incl generous commissions.
It must have been a few years since you've looked at indexed products. The typical competitive contracts today have cliff drops on expenses in year 5 (by about 50%) and year 10 (by another 35-45%.) By the 20th to 25th year, the annual lifetime internal costs average 1% or under. Whole & Variable never get anywhere near that low on internal annual average costs.

IUL commissions are significantly less than securities and whole life commissions over the same compared periods of time.

For tax reasons for all but old buyers contract must be held until death to avoid income taxes.
This is the same for all cash-value life contracts if using tax-free policy loans to distribute, instead of tax-deferred contract withdrawals.

If you want to distribute tax free, you have to keep the contract in force in order to keep the IRS exclusions in place.

Forget them, and instead buy a variable universal life policy (VUL) from tiaa-cref.org with no commissions and inclusion of dividends, now running about 2% on S&P 500. Choose TIAAs stock index fund at just 9 basis points annual cost.
How much are the 'surrender costs' paid in losing positions when the markets tank?

If risk averse, stick to whole life; best historical performer is Northwestern Mutual.
Average internal rate of real return on whole life (actual interest, not refunded over-paid premium,) is only around 3%. Better than losing to the markets, or a poke in the eye with a sharp stick... but less than half the 6-8% IUL average.

For returns on money you can't afford (or don't want) to lose, IULs are the best game in the market at present, hand's down.

Some day that may change... but its extremely unlikely whole life or naked variable life will ever come close... they just aren't designed or intended to compete on a safe growth basis. If/when Wall Street steps up, it will most likely be with 'structured banking products.'

Cheers,
Dave Donhoff
Leverage Planner
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