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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 76384  
Subject: Re: IUL credits *include* Dividends Date: 9/23/2013 5:54 PM
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Hi Synchro,

You can choose to define the phrase "includes dividends" in any way you like
It's not me, its the definition of the industry professionals who do this thing. I realize many here prefer certifications over basic thinking, and social conformity over facts. I can't help with the latter, but I reached out to the Allianz actuary again in one more attempt to help everyone who's still willing to think.

I asked;
I am addressing the complaint that “IULs rip off the client by withholding dividends” and they're confused by the standard IUL literature saying credits are determined by the ‘index not counting dividends.’ The arguers ignore the point that dividends, in part, determine caps… which then determine actual IUL yields.
I understand why the statement is worded as such… but the counter-argument by the anti-IUL crowd is wrong as well.
How would you suggest to explain that the actual IUL credits include the effects of dividends, since they affect the option portion of the calculation?


Andy Feldman's response;
One way is just what you've already said: the insurer has a lower cost to hedge the credits, so we can afford to offer a higher cap than we would otherwise. The insurer does not "keep" those dividends. For example, just comparing two different indexes within an IUL policy, the insurer doesn't make more profit if you allocate to an index with higher dividend yield. The insurer is (typically) neutral between all the allocation options they offer within an IUL.

But that might be exactly the point of the complaint: that the equivalent cap would be lower on an index that included dividends.
[such as the S&P, versus indexes that have no dividends.]

One other thing to consider... NDX dividend yields are lower than SPX, and the Barclays Aggregate bond index (a significant part of our blended index) does not have any dividends. The ability to choose these allocations with lower dividend yields could help address the objection for someone who doesn't understand that it balances itself out through the caps and cost of hedging.

Andy Feldman, ASA, MAAA
AIM Principal, Hedging

[Bracketed distinctions added]

NOW... I trust that if there are any objective lurkers reading, they'll be able to take the facts and apply their own logic.
IULs that are based on indexes that have dividends, pay credits that include the effects of those dividends.

MORE IMPORTANTLY... with, or without dividends, doesn't matter.
The bottom line is the bottom line, and if a no-dividend strategy wins more than a with-dividend strategy, it speaks for itself.

Dave Donhoff
Leverage Planner
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