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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 75540  
Subject: Re: Retirement, college, and Obamanomics Date: 1/1/2013 11:42 PM
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Hi KB,

The real question I have is: do the insurance companies truly use all of the alvailable funds generated by the fixed income securities to create these call spreads or are they skimming some of the income off the top? For example, if you have a $100,000 in your policy and their bond portfolio generates an average return of 5%, they should take that $5,000 to create the best option spread with the highest possible cap. But maybe they are only using $4000 to buy the options and keeping $1000 for themselves. In my mind, that is a valid concern and as a consumer I have no way to find that out.
Actually, all of the IUL companies (due to the nature of the universal chasis design) are required to fully disclose not just their corporate financials, but the broken out sub-parts, fees, and charges of their IUL contracts, and project those disclosures forward generally through age 120 of the client.

I can tell you, as a matter of financial fact, the numbers in regards to your question for one of the current top performing IUL carriers; Allianz Life.

Their general account yield is approximately 6.5% They acknowledge taking an 80 bip haircut off the top before applying a 5.7% credit to the IUL contracts, from which the client can choose to keep all the 5.7% yield as a fixed credit, or apply any portion (up to all of it) toward a cap spread with a floor as low as 0% to a ceiling as high as 19%

The Floor cap can be increased at the client's discretion (say to 1%, 2%, or 3%,) at an approximate cost of a ceiling cap decrease of about 2:1 (so the ceiling cap would drop 2 points for each additional 1% of guaranteed floor return.)

Allianz takes nothing from the hedge trade itself. They only take their standard disclosed fees, and the aforementioned haircut (dropping yield from 6.5% to 5.7%... while the best the retail public investor can get is still 1-1.5%.)

Now you have provided some nice data to suggest that simply buying an index, taking all of its gains and loses, and collecting the dividends provides superior returns to this IUL option strategy - this is most likely correct.
Nope, its incorrect by a significant degree, unfortunately. The IUL carriers unfair advantage comes from tax law that allows them to allot their general account yields to new client money, as well as significantly expand the tax-free contribution and distribution rules for the individual.

This 'unfair advantage' puts the IUL rolling average real dollar returns at superior performance the overwhelming majority of the time.

Cheers,
Dave Donhoff
Leverage Planner
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