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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 75340  
Subject: Re: Retirement, college, and Obamanomics Date: 1/1/2013 1:57 PM
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KB,

Excellent synopsis of how an IUL works in general.

Current interest rates on government and AAA corporate bonds are at historical lows - however, they could still go lower.
The big benefit of putting on this trade with an IUL provider is their trailing returns from an "old money" general account. These accounts are from a few billion to nearing a hundred billion large (depending on the companies) and are carrying old bonds & commercial real estate loans yielding around 6.5% to 6.8% currently.

New IUL buyers' money gets the benefits of the existing general account yield, versus new money yields for DIY or retail investors in the 1% range presently.

The large corporate accounts "turn over" about 15-20% per year due to maturities and new money dilution... so the net aggregate yield ends up being a "trailing average" that may continue to drop if current new money yields remain as low as they are now for a further extended period of time.

In *ALL* cases, however, new money will get greater yield from participating in the IUL corporate ("general") account yields than on a retail investor or DIY basis... UNTIL safe rates begin climbing again significantly above the general accounts' longterm trailing average yields.

Of course, whenever that occurs, the tax code allows existing IUL owners to rebalance their cash balance via collateralized loans at a fixed rate in the 5-6% range, to place into new money fixed yields in much higher rates for a guaranteed positive arbitrage.


I have no idea whether the current option prices are historically high, low, or average.
Option prices are determined by implied volatility, which is quite high at present... which means that current caps are lower than the historical norm (but doesn't mean they could trail further down, given further rate market depression.) That said, even at the current cap lows, if these restrictive caps (rather than the more liberal caps given in more positive markets) are applied to historical index performance, the worst-case rolling average returns are in the 6-8.5% range, depending on which blends of indicies are considered, and the length of the rolling periods considered (i.e. 10 year rolling averages, 15, 20, 25, 30...)


I don't personally use these exclusively for my own family's money... I still have a significant chunk in wrap accounts with a highly skilled manager (who many TMFers know,) and juggle a bit of my own particularly for sharp opportunity exploits in real estate. But the largest chunk of my family pie is growing in IUL strategies... there are just no superior choices, given the features provided.

*MOST* importantly, relative to the OP... I see *NOTHING* in *ANY* qualified college tuition plans that come anywhere close to what the IULs provide. Its a non-competitive conversation.

Dave
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