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IUL credits *include* Dividends

A while back, when Synchronicity started complaining he couldn't find any insurance company literature explaining how IUL credits actually include dividends, I shot off an inquiry to the actuaries at Allianz so they could provide exactly such a statement "from the horse's mouth" as it were.

I asked;
> Dividends are not part of the index price point calculation,
> HOWEVER, dividends *ARE* part of the market valuation calculation for options.
QUESTION:
What effect would a net increase, or decrease, in the overall aggregate dividends of a market (like the S&P) have on the cost of the floor/cap spread? The spread is of course long one option strike, and short another… but I don’t think the dividends have the same effect on ATM options as they do OTM.

Would an aggregate dividend increase cause an increase in the costs of the spread (all else remaining the same,) or a decrease in the cost of the spread?

The answer, from Andy Feldman, Allianz actuary;
David,

You're right that the effect of dividends is not the same at different option strikes. The effect is stronger on an option that is more in-the-money (or less out-of-the-money), because that option is more likely to be exercised.

In the case of our annual point-to-point crediting method with a cap, an increase in aggregate dividend yield would make the hedging cheaper, which would mean we could afford to increase the cap (all else being equal).

Forward-looking expected dividend yields on the S&P 500 are historically fairly stable, so I wouldn't expect dividend yields to have a big impact on our caps from year to year.

Hope that helps,
Andy Feldman, ASA, MAAA
AIM Principal, Hedging



Now that at least 32 recs (at present count) on Synchro's last request to be "bluntly" educated (post #73164) have been satisfied, we can put this one to bed. I trust that Andy Feldman spoke plain enough English for folks here to comprehend without closed captioning, yes?

Anyone complaining that IULs credits do not include dividends can be recognized as uneducated, or willfully disingenuous.


HAVING SAID THAT...
I'll also point out it is *IRRELEVANT*!!!

If the net/net risk-adjusted returns of the S&P500 fails to beat the fixed-reset indexing calculations of bouncing tennis balls, it doesn't matter of the balls are fuzzy or bald!

Dave Donhoff
Leverage Planner
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Now that at least 32 recs (at present count) on Synchro's last request to be "bluntly" educated...

In my experience, forum members recc a post that comports with their own bias, NOT one that necessarily advances the discussion. For example, I routinely recc intercst posts even though I disagree with him politically. Why not? If he makes his point in a compelling and civil manner, isn't that the purpose of the Fool's recc'g function?

Apparently not.

The practical reality is that internet discussion boards coarsen society when people can attack others for no reason other than that they don't agree with them.

Which Rayvt does CONSISTENTLY and, of course, others just mindlessly follow his lead by recc'g his nasty posts.

Rayvt = N.A.S.T.Y.

With IGU not far behind.
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WHHHELL.... I must admit, after I posted my commentary, I thought to myself "well Dave, that might have been a bit stronger than really necessary"...

Glad to see my snark has already been eclipsed ;~)

Dave
(Sorry to have not chilled a bit more. Class shouldn't drop itself to surrounding levels... mea culpa.)
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You're right that the effect of dividends is not the same at different option strikes. The effect is stronger on an option that is more in-the-money (or less out-of-the-money), because that option is more likely to be exercised.

In the case of our annual point-to-point crediting method with a cap, an increase in aggregate dividend yield would make the hedging cheaper, which would mean we could afford to increase the cap (all else being equal).

Forward-looking expected dividend yields on the S&P 500 are historically fairly stable, so I wouldn't expect dividend yields to have a big impact on our caps from year to year.

Hope that helps,
Andy Feldman, ASA, MAAA
AIM Principal, Hedging


Once again, Dave, you CONTINUE to confuse THE METHOD THE COMPANY USES TO INVEST TO PROVIDE RESERVES FOR THE CONTRACTS IT HAS ISSUED with THE CONTRACT TERMS STATING WHAT AMOUNTS ARE CREDITED TO THE CONTRACT.

I've only stated this...what, three times now? Ray has stated the same thing. I can't believe that you don't understand the difference at this point, and somewhat surprised that you continue to make a statement directly contradicted by the literature provided by the issuing companies. And before you tell me "Read what the3 actuary said (becuase believe it or not, I did and understand it completely), readers will note that the actuary is NOT saying "dividends are included in returns", in fact he specifically states "point to point crediting method with a cap" and then says that the insurer COULD choose (but is not required) to increase the cap IF their hedging strategy was less expensive, which an increase in dividend yield would cause IF "all other things are equal".

The fact that the insurance company makes overall pricing decisions (in this case, a decision regarding how high to set the "cap") based on anticipated costs is NOT AT ALL the same thing as saying "dividends are included in the returns".

For example, even if dividend yields went up, the issuer could choose not to increase the cap if mortality experience was worse than their expectations. Or if lapse rates are lower than their expectations. Or if any of a dozen other things happen. Heck, the insurer could simply choose not to increase caps even if none of those things happen, as the language of the contracts (as presented in links on this forum) DO NOT OBLIGATE THE ISSUER TO DO SO! Ray has posted this before, specifically quoting the "at our discretion" language directly frmo the issuer's documentation.

Anyone complaining that IULs credits do not include dividends can be recognized as uneducated, or willfully disingenuous.

You can choose to define the phrase "includes dividends" in any way you like, but it reminds me of the famous quote attributed to Abraham Lincoln "How many legs does a lamb have if you count the tail as a leg?" "Four, because calling the tail a leg does not make it so!"

-synchronicity
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Very curious that you didn't simply ask the actuary whether IUL credits include dividends.

(Hint: because sync is right)
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HAVING SAID THAT...I'll also point out it is *IRRELEVANT*!

The only thing I see as relevant is how much one gets to keep commensurate with the risk one is willing to take.

Option #1: If you're unwilling to monetize the risk--which, as we see, is difficult if not impossible to do anyway--and you're able to withstand periodic huge losses, then S&P500 B&H is for you.

Option #2: If you're unwilling to watch your retirement account experience periodic huge sell-offs, then an IUL--with its safety and tax benefits--is for you provided that you understand you may (not will) end up with more in a S&P500 B&H account had you gone that route.

With hindsight being 20/20 and with no hope for conservatives so long as they're running against Santa Claus, I take option #2.
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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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Very curious that you didn't simply ask the actuary whether IUL credits include dividends.

How would an actuary know? He is not a decision maker -- he's just a subject matter expert who supplies information to the people who *are* the decision makers.

That's kinda like when people asked me about upcoming cell phone features would be in the next Motorola phone, when they found out I was an engineer who worked at Motorola.

I trust that Andy Feldman spoke plain enough English for folks here to comprehend without closed captioning, yes?

Anyone complaining that IULs credits do not include dividends can be recognized as uneducated, or willfully disingenuous.


Dave, don't you recognise that this is a non sequitur?

And, in fact, Andy spoke very clearly and precisely. It's just that he said one thing and you heard him say something completely different. Happens to me all the time with song lyrics. Just the other day we were in the car and the radio played a song I've been listening to for 20 years. My wife sung along and at one point I said, "No, that's not what he sang." When we got home I looked it up (Google is my friend) and guess what? I've been hearing the wrong words for 20 years.

Sometimes it is best to step back and take a different look at a situation. Sometimes we get bogged down and take a stand that we'd not take upon dispassionate reflection.

Something that I was educated upon in my early years by my wife, (language cleaned up) goes: "If a dozen people tell you that you are [wrong} and zero people agree that you are not [wrong], then it's probably the case that you *are* [wrong]. You need to stop and ask yourself why so many people would be telling you that you [are wrong]."

A trick I learned is to "put on the bad-guy hat" and make a bullet-point list of how I'm wrong (from the viewpoint of my OPPONENT), and then try to prove (not assert -- prove) that every point is wrong.

=========================

It probably got lost in the dust-storm, but I made a post which examined the IUL figures, with an eye toward seeing if the evidence would support or refute the dividend claim. http://boards.fool.com/if-i-wanted-to-support-a-claim-such-a... # 73169 I'm pretty sure that the data there contradicts your claim. Would you care to comment on the figures there? And the conclusions, and whether or not they hold water?
It was actually picking up & answering the challenge that you laid down, so I'm interested in your assessment of it.

On its face, the DATA means everything, and WORDS mean nothing.

Hmmm, it just stuck me that there's another possible definition of "with dividends": "Index price gain, limited by floor & cap, plus dividends." I don't think that anyone has serious floated this definition, though.
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Hi Ray,

It probably got lost in the dust-storm, but I made a post which examined the IUL figures, with an eye toward seeing if the evidence would support or refute the dividend claim. http://boards.fool.com/if-i-wanted-to-support-a-claim-such-a...... # 73169 I'm pretty sure that the data there contradicts your claim. Would you care to comment on the figures there?

I think the 2nd response by our actuary (the post immediately above yours, which suggests it hit while you were still writing this one) pretty clearly answers your questions.

IULs returns that are calculated on indexes that have dividends, include dividends in the returns. If dividends were to increase on that index, the caps would increase, and the IUL credits would increase (and vice versa.)

Dave Donhoff
Leverage Planner

Hit me with your pet shark!
http://www.youtube.com/watch?v=0nVvRwrgsGU
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"If a dozen people tell you that you are [wrong} and zero people agree that you are not [wrong], then it's probably the case that you *are* [wrong]. You need to stop and ask yourself why so many people would be telling you that you [are wrong]."

Depends where the discussion is taking place. Most posters here are pure partisans, in my opinion.
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It's not me, its the definition of the industry professionals who do this thing.

Once again, this is amusing.

I am addressing the complaint that “IULs rip off the client by withholding dividends”

I am most definitely NOT stating or implying that "IULs rip off the client by withholding dividends". I am being very careful NOT to state any opinion pro or con regarding IULs in general, or any insurance product, or any insurance company, or any other investment, for that matter. In fact, I have stated MULTIPLE TIMES that the suitability of an IUL or any other insurance product or investment vehicle can only be determined on a case by case basis, as differing individuals have differing goals, objectives and risk tolerances.

I AM stating that, by the ordinary definition of the words "includes dividends", that an IUL contract is credited by changes in the NUMERICAL VALUE OF THE INDEX, on a point-to-point basis, subject to the floors and caps (and participation rate) as per the contract terms.

I am repeating this very clearly because, for a number of reasons, it is an extremely important point for me, and I will not have what I am stating redefined by you or anyone else so as to imply that I am asserting something different.

Put in a perhaps overly straightforward manner - Don't put words in my mouth.

Now, the actuary you contacted at Allianz stated the following:
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.


In other words, as I've stated multiple times, the insurer attempts to determine their pricing for the product (which would impact cap rates as noted and possibly other items) based on their expected returns of the portfolio assets that are effectively supporting the contracts sold of that product. In addition to dividend yield, volatility and interest rates can also impact option prices. Without knowing the specifics of the nature in which they invest (which I assume is proprietary information), I could not tell you exactly how those differing factors would impact their pricing decisions on an IUL.

However, I CAN say, once again, that you are deliberately confusing the issue of HOW an insurance company chooses to price and structure their products (which depends on many issues, including the expected returns of investments and the costs of purchasing derivatives to "hedge" a portfolio in the manner they believe is appropriate) and THE ACTUAL TERMS OF THE CONTRACT PURCHASED! It is the LATTER item that we are discussing here, and, as stated numerous times now and as I will state again, every IUL product that has specifically been discussed on this board credits the account by reference to THE POINT TO POINT CHANGES IN THE INDEX/INDICES CHOSEN, and those values DO NOT INCLUDE DIVIDENDS PAID BY THE UNDERLYING COMPANIES WHICH COMPRISE THOSE INDICES!

That is a straightforward statement of fact. It does not mean that IULs are "a rip off" or anything of the sort. The suitability of an IUL, or any other insurance product, annuity, or other investment assets (including collectibles, precious metals, or any other item one can imagine), will vary depending on the objectives and goals of the client. Every type of asset has differing characteristics.

I will also note as a tangential point, again, that although the insurance company may be willing to increase the "cap", or reduce premium, or otherwise modify the terms of a policy as allowed per the contract in a way favorable to the policyholder if their costs decline for whatever reason (which could include a lower cost to hedge their portfolio), they are not "obligated" to do so. One can state that market forces would cause that to happen, but that is a VERY different thing from stating that the company is legally bound to do so.

I want to repeat, once more: I am not casting aspersions on IULs in general or specifically, in fact I am not making any statements, positive or negative, about the product or about any issuer of the product. I am simply stating the following:

A) Saying that the pricing of an insurance product is determined in part by the costs to an insurer, and one aspect of that cost is impacted by dividend yields on indices, is NOT the same as saying that the amounts credited to an IUL contract "include dividends".

B) The amounts credited to the account are calculated by reference to the point-to-point changes in the numerical indices chosen and those values do not include dividends paid by the underlying companies. Period. That is the specific language of the contract.

C) The fact that dividend yields often have an impact on the pricing and terms of an IUL policy is interesting and good to know, but the company is not legally obligated in any way to make any changes to the policy if dividend rates change.

I hope I've made myself clear. I understand what you're saying and have made my disagreements with your definition of "includes dividends" apparent. At this point I believe we're speaking in circles and I do not see any reason to repeat this discussion.

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.


On this issue we agree. It's a variant of the argument about the expenses inherent in annuities or any other product - if, after expenses, the product remains the best fit for a client's goals and objectives, then it is the best fit, regardless of those expenses. Certainly one can look for product choices within a certain class that minimize expenses while still achieving the desired goals.

-synchronicity
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IULs returns that are calculated on indexes that have dividends, include dividends in the returns. If dividends were to increase on that index, the caps would increase,

This whole discussion is pointless and non-productive.

The credit that is applied to an IUL is quite clearly specified in the brochures and contracts. Point-to-point change in the index (price only, excluding dividends), "Any positive change from the previous year, up to the cap (which is subject to change on annual basis), is credited to the policy. If the total is negative, the indexed interest for that year will be zero."

This is what I implemented in my spreadsheet. I coded up the description of what the various IUL bochures from several different companies all said. In fact, I originally had it wrong and Dave corrected me, so I corrected the spreadsheet accordingly.

We can argue all we want about how the company sets the cap -- but that is immaterial. The policy gets the point-to-point annual change in the index, up to the cap. If the company feels magnanimous and sets to cap to 99%, the amount credited *still* excludes dividend -- because that's what the policy says.

=========
I tend to approach these things from an engineer's point of view. Check the inputs and the outputs. Is the output different depending on the presence or absense of input X?

Here's the way I would have questioned the actuary. Simple and succinct.
Situation: Suppose that on Jan 1, 1998 the S&P500 index was 1000, and on Jan 1 1999 the index was 1050. Today is Jan 2, 1999.
Q1: If the S&P had paid 1% dividend in 1998, what amount would be credited to the account?
Q2: If the S&P had paid 5% dividend in 1998, what amount would be credited to the account?

Everything I've read says that the answer is 5%, for both Q1 & Q2.
I believe Dave contends that answers would be 6% for Q1 and 10% for Q2.
What does Dave say?
What does Allianz's actuary say?
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Re: this discussion being non-productive.

Two somewhat on-topic quotes:

"Amateur analysts and wannabe traders are obsessed with being right. Within 30 seconds I know if the person is engaged in the markets to pursue profits or to stroke their self-ego." -- Michael Harris

"Some people are obsessed with being right on a market. I would rather make money on a trade with no knowledge of the market than be an “student of the market” who knows it all but does not have the IRS Schedule Ds to back it up. " -- Michael Harris
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Synchro,

I am most definitely NOT stating or implying that "IULs rip off the client by withholding dividends".
I never said *you* did... but while you're busy having an aneurysm, there are actually others participating on this community, and more than one *HAVE* made such a claim.

Its not *all* about you, buddy.

I AM stating that, by the ordinary definition of the words "includes dividends", that an IUL contract is credited by changes in the NUMERICAL VALUE OF THE INDEX, on a point-to-point basis, subject to the floors and caps (and participation rate) as per the contract terms.
And while you keep repeating opinions, I have provided factual proof to my statement;
IUL credits include dividends (when the index used has dividends.)

Everyone has the right to conjur up their own opinions, and yours are incredibly popular.

My facts are right.

I want to repeat, once more: I am not casting aspersions on IULs in general or specifically, in fact I am not making any statements, positive or negative, about the product or about any issuer of the product.
Sure, and I recognizethat. Prior to getting this earworm in your head about dividends, you've been quite balanced.

I am simply stating the following:
A) Saying that the pricing of an insurance product is determined in part by the costs to an insurer, and one aspect of that cost is impacted by dividend yields on indices, is NOT the same as saying that the amounts credited to an IUL contract "include dividends".

Fine... saying 'A' is not the same as saying 'B.'

IULs that credit on indexes with dividends, pay credits that include dividends.

B) The amounts credited to the account are calculated by reference to the point-to-point changes in the numerical indices chosen and those values do not include dividends paid by the underlying companies. Period. That is the specific language of the contract.
Wrong, as proven and explained by someone who actually executes the IUL trades. There is no IUL contract stating that dividends are excluded from the determination of the caps, and there *IS* an actuary on record stating that exactly as true.

C) The fact that dividend yields often have an impact on the pricing and terms of an IUL policy is interesting and good to know, but the company is not legally obligated in any way to make any changes to the policy if dividend rates change.
Nobody's ever said otherwise. Competition in the markets is the best enforcer.

I hope I've made myself clear. I understand what you're saying and have made my disagreements with your definition of "includes dividends" apparent.
You have made your opinion clear... oddly, even after a non-anonymous actuary of arguably the largest IUL provider on the planet has explained how you are wrong.

But again, everyone has the right to be wrong, too.

The bottom line is the bottom line, and if a no-dividend strategy wins more than a with-dividend strategy, it speaks for itself.
On this issue we agree.


Great... let's let go of silly points that we agree are irrelevant anyway.

I have always respected you, and have no bone to pick with you. Peace brother!
Dave Donhoff
Leverage Planner
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And while you keep repeating opinions, I have provided factual proof to my statement;
IUL credits include dividends (when the index used has dividends.)


Dave, I'm going to leave this with one last, very simple question.

If "IUL credits include dividends", as you keep insisting they do...

Then why doesn't Allianz, or any other IUL issuer, state in their marketing or informational brochures which are distributed to the public, that "IUL credits include dividends"?

Words and phrases have certain meanings. If your rather...unusual interpretation of the actuary's comments was one that was accepted, then it would be no problem to say that to the public in marketing the products.

-synchronicity
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Hi Ray,

Here's the way I would have questioned the actuary. Simple and succinct.
Situation: Suppose that on Jan 1, 1998 the S&P500 index was 1000, and on Jan 1 1999 the index was 1050. Today is Jan 2, 1999.
Q1: If the S&P had paid 1% dividend in 1998, what amount would be credited to the account?
Q2: If the S&P had paid 5% dividend in 1998, what amount would be credited to the account?

Everything I've read says that the answer is 5%, for both Q1 & Q2.
I believe Dave contends that answers would be 6% for Q1 and 10% for Q2.
What does Dave say?

I'd be confident that the '98 credit would be 'whatever it was' as determined by the option spread, which includes dividends. It *IS* objectively calculable, but so far above my paygrade I trust the sharp competitive teeth of the options market to keep it accurate on the fly.

I'd be confident that, all other factors unchanged, the effect of a quintupling of the dividend would inescapably have an effect of increasing the IUL credit for '99.

How much specifically? That's back to the valuations of the options markets.

What does Allianz's actuary say?
You can go read it. He said "more dividends means higher credits."

Dave Donhoff
Leverage Planner
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Hi Synchro,

If "IUL credits include dividends", as you keep insisting they do...
Then why doesn't Allianz, or any other IUL issuer, state in their marketing or informational brochures which are distributed to the public, that "IUL credits include dividends"?

Easy to answer; You are no dummy in this realm... you state you are not a financial advisor, but you are certainly not unsophisticated. You've understood how & why dividends affect IUL credits relatively quickly after I'd begun explaining, but took doggedly to arguing about the "commonly understood" meanings (rather than actual reality.)

Have you noticed how blindly confused *some* other folks around here get about this?

One part of the IUL credit calculation is the specific price print of the index. Simple folks get confused about whether this includes, or excludes, dividends... so the IUL companies state "not including dividends."

The other 2 parts of the IUL credit calculation (the floor & ceiling) include dividends... but frankly, very few people in the investing public understand options at all, and its not necesary to understand them to use an IUL anyway... so there is no real upside to being that candid about the guts of the product.

Words and phrases have certain meanings. If your rather...unusual interpretation of the actuary's comments was one that was accepted, then it would be no problem to say that to the public in marketing the products.
Andy had no problem explicitly explaining that dividends are included. The only 'problem' with highlighting it as a brochure issue is that its far above the financial sophistication level of most people who would read it.

Its true, but unnecessary for the use of the product... and completely irrelevant to the bottom line of the product.

Cheers,
Dave Donhoff
Leverage Planner
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I have provided factual proof to my statement;
IUL credits include dividends (when the index used has dividends.)

Then could you PLEASE post a link or a pdf or something from an IUL company that says this.

Some authoritative source. Best would be a step-by-step list of how the credit amount is arrived at. I'm pretty sure I saw this once somewhere.

Make it easy for us -- preferably use an index that we can easily get information about, like the S&P500 or the DJIA.

And could you answer the question I posed last night in msg # 73247. (Maybe you already have but I just haven't see it you.)



There is no IUL contract stating that dividends are excluded from the determination of the caps
1) Non sequitur.
2) We are talking about the amount credited to the account, not how the caps are set. Two completely different things.
3) Do any IUL contracts state how the determination of the caps is made? ARM mortgages state in detail how the interest rate is determined -- do IUL contract have an equivalent clause?
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Dave, you are evading the question. I'll rephrase and be more specific, in an attempt to elicit a responsive answer.

Situation:
* Dec 25, 1997, company announces "The cap for the upcoming year (1998) is 99%."[*] [**]
* On Jan 1, 1998 the S&P index was 1000.
* On Jan 1, 1999 the S&P index was 1050.

* A factoid of no impact: Dec 25, 1999, company announces "The cap will remain at 99%."

Scenarios:
Today is Jan 2, 1999.
The company is preparing its books to credit an amount X% to all its IUL accounts. What is X?

Scenario 1: If the S&P had paid 1% dividend in 1998, what amount would be credited to the account? What is X?

Scenario 2: If the S&P had paid 5% dividend in 1998, what amount would be credited to the account? What is X?


Just to be clear: The IUL's index is the S&P500.



---------------
[*] The CEO got a new trophy wife, Tibetan yak-milk futures went through the roof, the company is trying to grab business from GEICO, and all is good with the world.

[**] In practice this means no cap -- the highest ever annual point-to-point gain of the S&P was 53%. This was July 1982 to July 1983.
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Dave, you are evading the question. I'll rephrase and be more specific, in an attempt to elicit a responsive answer. ~Obnoxious Ray

Dave, let me ask another way. If you could be more specific, that would be great.
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"This whole discussion is pointless and non-productive."

To the extent that you and synchro caused a lurker like me to look at the numbers and see more clearly how IUL's work, it was a very productive thread.
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Dwdonhoff: "I think the 2nd response by our actuary (the post immediately above yours, which suggests it hit while you were still writing this one) pretty clearly answers your questions.

IULs returns that are calculated on indexes that have dividends, include dividends in the returns. If dividends were to increase on that index, the caps would increase, and the IUL credits would increase (and vice versa.)"


Would increase? B.S. Might increase, but the IUL provider is not obligated to increase the caps if the dividends increase.

Regards, JAFO
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Had a boring drive in the car, gave me a chance to ponder upon this.

The contention is that dividends are implicitly included in the IUL returns in the form of increased cap.

Stipulating that this is the case:
What that would mean is that the dividends for year T don't get credited in year T but in years T+1, T+2, etc. If a person closed their account at the end of year T, they would never get the benefit of the dividend. If a person opened an account at year T+1, then they *would* get the benefit of the dividends of year T.
That would be .. weird.

It is left unspecified just how the dividend is accounted for in the cap, so there's no way to verify that the benefit is actually received.

Aside from that, even if the cap is increased for year T+1, the benefit is only delivered if the index gain for T+1 is reached. If the gain is less than the old cap, then there is no benefit delivered. Also, the increased benefit is only that accounted for by the marginal increase in the cap -- like from 12% to 13%.

Tha all seems unlikely --- but the evidence would show up in the data.

So what would need to be show is:
* When the dividend of the index is increased and decreased, does the cap increase & decrease by a related amount in the next year?
* How frequently does the cap change? I would suspect that insurance ccompanies are reluctant to change the cap frequently.
* The only way the benefit of an increased dividend would be captured is if the index gain of year T+1 is larger than year T *and* the cap is increased *and* the index gain is larger than the old cap.


I can get data on S&P500 dividend yield. It jumps all over the place. Between 1960 and 1993 it ranged from 2.9% to 5.2%. If somebody can provide me with the caps of an IUL, we can compare and see where the ups and downs of the cap are in relation to the ups & downs of the dividends.

Extraordinary claims require extraordinary proof. In this case the IUL brochures say that dividends are excluded, so a claim to the contrary requires clear and convincing proof.

Not handwaving, not just-so stories -- numerical proof.

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It's all balderdash. The claim is BS. If anyone can show data that supports the claim, THEN I'll retract my comment. But the data *has* to show the effect of the dividends. Counterfactuals won't do.
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Wow, great discussion, heated though it may be (when is that NOT the case on the internet?).

Just to clarify, from a rank amateur: Is the basic premise here that index dividends only affect hedging/administrative costs of the IUL, occasionally lowering them at the discretion of the insurance company? I can see how that may be interpreted as inclusive in overall returns (lowered costs), but it strikes me as rather misleading (which seems to be the genesis of this entire discussion). That said, I've learned over the years that reading the fine print is imperative with ANY insurance investment product, and that their legal departments are particularly adept at deception within the confines of the law.

Please let me know if I'm way off, though - it very possibly flew way over my head.
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Same questions, slightly different scenario:

Situation:
* Dec 25, 1997, company announces "The cap for the upcoming year (1998) is 12%."
* On Jan 1, 1998 the S&P index was 1000.
* On Jan 1, 1999 the S&P index was 1150. (15% index growth)

Scenarios:
Today is Jan 2, 1999.
The company is preparing its books to credit an amount X% to all its IUL accounts. What is X?

Scenario 1: If the S&P had paid 1% dividend in 1998, what amount would be credited to the account? What is X?

Scenario 2: If the S&P had paid 5% dividend in 1998, what amount would be credited to the account? What is X?
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