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Author: synchronicityII Big funky green star, 20000 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: Hi gang... wow!!! Date: 9/18/2013 10:56 PM
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I have been largely silent on this thread (but an avid reader) but I think that running any insurance product/IUL with rates other than those actually guaranteed by the insurance company, not those currently available but subject to change by the insurance company at any time for any reason, borders on fraudulent (unless both run),

I believe any insurance illustration would include results for both guaranteed rates (and maximum expenses) and current rates.

I would say that for most types of policies the guaranteed rates and maximum expenses are a worst case scenario that are incredibly unlikely to come to pass. That said, it's not uncommon to run illustrations at a half point to a point below current scale, especially in an environment where interest rates have been moving lower and/or where interest rates are generally above historical norms.

What we're talking about here is a different matter, however. We're trying to determine if an IUL (specifically, the current Allianz product, it appears) is "worth it", in terms of lowered volatility but the likely reduced returns. For this we can look at the product as currently structured and either apply historical rates or do a sort of "Monte Carlo" simulation using market returns, and obtain an approximation of expected returns and expected volatility.

The first check might be to simply apply the floor and ceiling caps to the S&P 500, as this would be the equivalent of applying the caps with absolutely no fees or expenses. If the strategy underperforms a mix of the S&PP with US treasuries at the same volatility, then there's no need to go any further. However, if it outperforms, then we would need to model it using the fees and expenses of the actual product.

I agree that there is a nonzero risk that the company may change various aspects of the product as allowed for in the contract terms, which may result in underperformance relative to its current structure.

-synchronicity
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