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We are buying a house for sale by owner. We will be paying cash for this house, and then refinancing it in a couple months. The owner has paid for the house and has no mortgage either. So, (in my mind) the closing might be reasonably simple, with no loans to be obtained or paid off by the owner.

The owner wants to move out on July 20th and 21st - a weekend. Should we not close on the house until she has moved out? My thought is yes, because if we close and then let her move out, she might damage something while moving furniture, etc., and then we will have already closed on the house and given her a check, and will have no recourse. Right?

Is there some way to do the closing and then the Title company will hold the check until we do a final walk through or something like that? How is this normally done? I have only bought empty houses in the past, so not sure how to deal with an owner moving out, etc. Any advice or tips? Thanks!

Footsox
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Should we not close on the house until she has moved out?

Yes. The order is:

Move out
Walk through
Closing

Enjoy your new home.

Phil
Rule Your Retirement Home Fool
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This should be specified in the contract. Traditionally in most states, you do a walk through before closing, at which point the property should be broom swept clean. Then you go settle, receive the keys and move in at will.

IP
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Hi Footie,

Something different to add here;
We will be paying cash for this house, and then refinancing it in a couple months.
<SNIP>
The owner wants to move out on July 20th and 21st - a weekend.

Given its June 6th this morning (and will probably stay that way all day ;~) you have plenty of time if you start immediately to get your purchase financing in place, at the lower purchase rates & fees.

Waiting to refinance will cost more, and be more restrictive in what you are allowed to borrow.

Cheers,
Dave Donhoff
Leverage Planner
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You do realize that the mortgage won't be a purchase mortgage? Interest deduction is limited to the first $100,000 of the mortgage, and not deductible under AMT?
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Probably not a popular view but unless it's the only way you can buy it, I wouldn't buy a rental property for cash.

On the closing, what does the contract and your lawyer say ? You have a lawyer, right ?
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You do realize that the mortgage won't be a purchase mortgage? Interest deduction is limited to the first $100,000 of the mortgage, and not deductible under AMT?

To me this implies that a purchase mortgage interest is deductible under AMT. Did we do our taxes wrong? Turbo Tax told us we could not deduct our purchase mortgage interest because we were subject to AMT.

IP
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To me this implies that a purchase mortgage interest is deductible under AMT.

It is.

Did we do our taxes wrong? Turbo Tax told us we could not deduct our purchase mortgage interest because we were subject to AMT.

Sounds like your taxes were wrong to me. Purchase mortgage interest on up to $1 million of borrowing is deductible for AMT.

You might want to move further discussion on that over to the Tax Strategies board.

--Peter
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Lovely. Maybe this will finally convince DH to fork taxes over to a pro.

IP
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So, (in my mind) the closing might be reasonably simple,

Closing in my mind is never simple. Disclosures and inspections are not trivial. We are in Silicon Valley. There are required disclosures separate from required items that are verified by the inspections(specific earthquake strapping on hot water heater, CO2 detector, etc...).

I am just hoping that there isn't a major earthquake before closing. The risk of another fire is low, but I still drive by the house on my way to work and check that it is still okay.
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You do realize that the mortgage won't be a purchase mortgage?

Interest deduction is limited to the first $100,000 of the mortgage, and not deductible under AMT?


Peter, Will you please comment on the above? My understanding was tax law has changed. Previously if a home loan was not used for purchased one was limited to interest deduction on the first $100,000.

I've now heard that if a loan is placed on a home purchase within a certain time frame of that purchase, then the $100k loan / mortgage interest deduction has been increased?

I've recently assisted an attorney who bought his primary residence for cash, then within 60 days of closing did a "cash out" refinance for $417,000. He mentioned to me that all of the interest would be deductible. I believe he mentioned he had 6 months from time of purchase to close on financing. TIA.
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We will be paying cash for this house, and then refinancing it in a couple months. The owner has paid for the house and has no mortgage either. So, (in my mind) the closing might be reasonably simple, with no loans to be obtained or paid off by the owner.

When we bought a house for cash in VA, our part of closing took all of about 5 minutes. The seller came to sign papers after we were gone, and had already allowed me to take possession the night before.

IP
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http://www.irs.gov/pub/irs-pdf/p936.pdf

You buy your home within 90 days before
or after the date you take out the mortgage.
The home acquisition debt is limited
to the home's cost, plus the cost of any
substantial improvements within the limit
described below in (2) or (3). (See Example
1 below.)


Okay, I am wrong. It isn't the first time.

There is a 90 day window to obtain the mortgage.
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vkg: " http://www.irs.gov/pub/irs-pdf/p936.pdf

"You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1 below.)"

Okay, I am wrong. It isn't the first time.

There is a 90 day window to obtain the mortgage."


90 days eitehr side of closing is a six month window; perhaps you client was right as to the six month window but wrong on when the window opened and closed.

Regards, JAFO

PS - And I am not certain that IRS rules would alter Texas homestead law, which would bring its own limitations (at least nto without researching it).
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Peter, Will you please comment on the above?

Shoot. I was trying to stay out of that one. I didn't know the answer off the top of my head and I'd have to do some reading to find the answer. Which I have now done.

I've now heard that if a loan is placed on a home purchase within a certain time frame of that purchase, then the $100k loan / mortgage interest deduction has been increased?

Others have already commented, and I agree with them.

It's not that the $100k home equity indebtedness limit was increased. It hasn't. Instead, you have a window of time to acquire both a loan and the home. Debt may be treated as incurred to acquire the residence to the extent of expenditures to acquire the residence made within 90 days before or after the date that the debt is incurred.

--Peter
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There is a 90 day window to obtain the mortgage.

Thanks all.

This is certainly a time when you want to choose a Loan Officer and mortgage company based on service. It would be a costly error to base a decision on a mortgage company as if you were buying a commodity and then not close within 90 days of your purchase.

In my scenario the attorney purchased his primary home for cash, this differentiated him from other bidders on the home. His cash offer provided a ten day closing from contract ratification.

I started working with him shortly after he bought the home. He was referred from a past client. As the loan closed after he purchased the home, the loan was viewed as a cash out refinance vs a home purchase loan, and there was a slight bump to rate. Glad to see confirmation on what he told me, that the mortgage interest on this loan is tax deductible.
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The owner wants to move out on July 20th and 21st - a weekend. Should we not close on the house until she has moved out? My thought is yes, because if we close and then let her move out, she might damage something while moving furniture, etc., and then we will have already closed on the house and given her a check, and will have no recourse. Right?

Yes, the current owner should move out before closing - because if you close while they're still in the house they may not move out, and then you have to go through the trouble of evicting them.
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Yes, the current owner should move out before closing - because if you close while they're still in the house they may not move out, and then you have to go through the trouble of evicting them.

Rent back situations do occur. The current local real estate market has been very hot. Allowing an owner to rent back for a few weeks can make a difference in whether or not an offer is accepted.
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Yes. The order is:

Move out
Walk through
Closing


If I was a seller living in the property, the step before Move Out would be that the funding is in place.

(In our case, we actually have moved out. Allowing a lock box without concern for personal property and not having to worry about when the property was being shown makes it less stressful for us and easier for the real estate agents.)
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We have agreed with the seller to do a walk thru after she has moved out, then go to closing. All is happy in paradise.

Thanks for all the advice!

Footsox
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You do realize that the mortgage won't be a purchase mortgage?

Not necessarily. You have a limited time after a cash closing to set up a qualifying mortgage. See Pub 936.

Phil
Rule Your Retirement Home Fool
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Turbo Tax told us we could not deduct our purchase mortgage interest because we were subject to AMT.

Is there some place (perhaps the 1098 input screen) where you forgot to tell TT that it's a purchase rather than equity loan?

Phil
Rule Your Retirement Home Fool
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Is there some place (perhaps the 1098 input screen) where you forgot to tell TT that it's a purchase rather than equity loan?

No, I was in error. Something got lost in the translation regarding why our taxes were so high.

IP
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Hi guys, I think we are off the topic, but I will ask in this thread anyway..... if I buy a house for cash, and then refinance the house in 90 days or in 4 years or whenever, won't I still be able to deduct the mortgage interest? This house we are buying is an investment property - it will be a rent house. I would be getting a refinance mortgage on it, and not a home equity loan, right? I think there is a difference, right? Thanks always for your informative replies.

Footsox
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...if I buy a house for cash, and then refinance the house in 90 days or in 4 years or whenever, won't I still be able to deduct the mortgage interest? This house we are buying is an investment property - it will be a rent house.

I would think that with it being an investment property, that you could deduct the interest as a business expense. We fully expect the mortgage interest deduction on second homes to go away, but if rented out as a vacation rental rather than a personal vacation home, it should still be a business expense.

IP,
so clearly not a tax pro
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Hi guys, I think we are off the topic, but I will ask in this thread anyway..... if I buy a house for cash, and then refinance the house in 90 days or in 4 years or whenever, won't I still be able to deduct the mortgage interest? This house we are buying is an investment property - it will be a rent house. I would be getting a refinance mortgage on it, and not a home equity loan, right? I think there is a difference, right? Thanks always for your informative replies.

Footsox


If you pay cash and then obtain a mortgage, the mortgage is not a refinance. Refinance requires that there be an existing mortgage.

To deduct interest on acquisition cost, the mortgage needs to qualify as acquisition mortgage. 4 years isn't going to qualify.

You should ask this question on the tax board.
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Hi vkg,

If you pay cash and then obtain a mortgage, the mortgage is not a refinance. Refinance requires that there be an existing mortgage.
This is not true... but also not relevant.

*EVERY* purchase is financed (unless it is a straight deed transfer without consideration/money traded.) If there is money traded for property, that money has to be financed from somewhere/someone. Whether it is taken from a banker's account, friends/family, or your own 401(k) or taxable account... with, or without, written repayment terms is irrelevant to whether it is financing.

Anyway... what it is called is irrelevant to the question of tax deductibility... which has now been pretty well answered by Peter, I believe.

Dave Donhoff
Leverage Planner
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if I buy a house for cash, and then refinance the house in 90 days or in 4 years or whenever, won't I still be able to deduct the mortgage interest? This house we are buying is an investment property - it will be a rent house.

OK. That's a completely different can of worms.

Most things up-thread are correct for your primary residence. But since this isn't a primary residence, the rules are different. So ignore it all and let's start over.

To be deducted against the rental income, the loan proceeds have to be used in the rental activity. Clearly, if you get a loan at the time of purchase, you're fine. Deduct the loan interest from the rental income. And while I haven't researched it, I'm pretty sure that you'd be able to pay cash and then get a loan shortly after closing and still be OK. (Offhand, I'd guess that 90 days is still about right.)

But I'm also pretty sure there is a point at which getting a loan would be too late, and your suggestion of 4 years is almost certainly past that point. In that setting, you have to follow the loan proceeds to see what to do with the interest paid.

So if the loan proceeds went into your brokerage account, you've have investment interest and would have to follow those rules to determine how much, if any, of the interest is deductible. If the loan proceeds went to purchase another rental property, you'd deduct the interest from the rental income from THAT property, and not the one that is actually securing the loan. If you used the loan proceeds to buy a second residence for yourself, you'd have no deduction.

So it's important to determine what financing you want and get it in place promptly. Your assumption that you can get financing any time you want and still deduct it is not correct.

Back to your current issue. It sounds like you have already made your all-cash offer on the property. I'm guessing that means you have no financing contingency for your transaction. However, there is still nothing preventing you from getting a loan now and using that to complete the purchase. While I'd suggest consulting a local real estate lawyer to be sure, my understanding is that having no financing contingency means that you can't use any financing problems as an excuse to back out of the transaction and keep your security deposit. You committed to completing the purchase with or without a loan.

As long as you can complete the transaction within the time frames you agreed to, you can still use financing at the purchase if you want to.

--Peter
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Rent back situations do occur. The current local real estate market has been very hot. Allowing an owner to rent back for a few weeks can make a difference in whether or not an offer is accepted.

True - but a buyer in that situation needs to keep in mind they're taking on all the risks of being a landlord in that situation - including what happens if the seller refuses to move out at the end of the rent-back period.
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But I'm also pretty sure there is a point at which getting a loan would be too late, and your suggestion of 4 years is almost certainly past that point.

Could the OP set up the rental as an LLC or some entity and then loan their money to the LLC, later refinancing the "purchase money"?

Probably easier to just do financing up front, but an option that keeps options open?

IP
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True - but a buyer in that situation needs to keep in mind they're taking on all the risks of being a landlord in that situation - including what happens if the seller refuses to move out at the end of the rent-back period.

Agreed, most work out but occassionally it is a large mess.

Occassionally, it is just a minor problem to get the previous owners out. Neighbors were in foreclosure, and had to sell to guarantee they got their equity. It was less than a 1,400 square foot house. It took several weeks for them to finish moving out. The amount of stuff that came out of the house was amazing, and they moved most of it into storage. They were expecting to sell some of the stuff, but it is nearly impossible to recover storage fees from the sale of household stuff.
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But I'm also pretty sure there is a point at which getting a loan would be too late, and your suggestion of 4 years is almost certainly past that point.

Could the OP set up the rental as an LLC or some entity and then loan their money to the LLC, later refinancing the "purchase money"?


I gotta hand it to those who pitch LLC's. Seems like people are convinced they'll do anything except provide the secret meaning of life. Even though at least 90% (educated guess) of them are disregarded for tax purposes.

You should have kept reading in Peter's response. The interest would still be deductible. It would just require tracking.

Phil
Rule Your Retirement Home Fool
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You should have kept reading in Peter's response. The interest would still be deductible. It would just require tracking.

And I did. But it also sounded as though you had to keep on using those funds for more real estate investments for it to be deductible, rather than to pay for your initial purchase on payments and use the principal for whatever.

I gotta hand it to those who pitch LLC's. Seems like people are convinced they'll do anything except provide the secret meaning of life.

I am convinced of nothing, other than no question asked in earnest should ever be ridiculed.

IP
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I am convinced of nothing, other than no question asked in earnest should ever be ridiculed.

IP


I would give Phil a little slack on the LLC issue. I didn't take his response as a ridiculing you, but more generic comment on scammers that try to sell LLCs as the answer for all problems.
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Could the OP set up the rental as an LLC or some entity and then loan their money to the LLC, later refinancing the "purchase money"?

I'd have to do a good search of case law, but if it worked (and my gut says it won't) it would have to be a corporation or an LLC that elected to be taxed as a corporation. My gut is saying "no" because of related party issues.

I'm sure a disregarded LLC won't help at all. And an LLC taxed as a partnership probably won't work, as most partnership debts are attributed directly to the partners.

The best possibility (and it's still a long-shot) would be if there were an unrelated business partner (really a shareholder, as it would be a corporation) involved. And the loan would have to come from just one of the partners. And even then, you've still got to deal with the tracing rules. And the shareholder loaning the money would have interest income from the loan and would potentially get into the self-charged interest arena - a corner of tax law that I have successfully avoided so far.

In short, I can't give an absolute "No" to the possibility of using an entity because I don't know every arcane corner of tax law. But my gut is screaming "No".

--Peter
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Dwdonhoff:

<<<If you pay cash and then obtain a mortgage, the mortgage is not a refinance. Refinance requires that there be an existing mortgage.>>>

This is not true... but also not relevant.>>>

"*EVERY* purchase is financed (unless it is a straight deed transfer without consideration/money traded.) If there is money traded for property, that money has to be financed from somewhere/someone. Whether it is taken from a banker's account, friends/family, or your own 401(k) or taxable account... with, or without, written repayment terms is irrelevant to whether it is financing."

I am going to disagree. IN the context of real estate, reciting that a property is financed implies a mortgage loan (and mortgae or deed of trust securing the loan. Think about contracts that contain a "financing contingency" versus contracts that are for cash (and without a fincing contingency). That diference would make no sense emplying your suggested definition of financing.

You definition implies that a home that is owned free and clear of any debt is still financed?

"Anyway... what it is called is irrelevant to the question of tax deductibility..."

Agreed.

Regards, JAFO
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Hi JAFO,

I am going to disagree. IN the context of real estate, reciting that a property is financed implies a mortgage loan (and mortgae or deed of trust securing the loan. Think about contracts that contain a "financing contingency" versus contracts that are for cash (and without a fincing contingency). That diference would make no sense emplying your suggested definition of financing.

I agree with you in the context of real estate contracts. In the context of financial planning, all funds most leave their alternative accounts in order to be applied to real estate equity... and that is financing.

You definition implies that a home that is owned free and clear of any debt is still financed?
In the broader context of balance sheet planning, yes. The funds held in the real estate equity account are being held at the expense of the alternative equity accounts.

Cheers,
Dave Donhoff
Leverage Planner
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You definition implies that a home that is owned free and clear of any debt is still financed?
In the broader context of balance sheet planning, yes. The funds held in the real estate equity account are being held at the expense of the alternative equity accounts.


In a certain sense, this is true.
But most people don't think of it that way -- even people who should know better. Like this thread: http://www.early-retirement.org/forums/f28/happy-day-paid-of...
I've given up trying to rain on their parades, other than an occasional remark about having a 4% mortgage and earning 6%-7% in my bonds and preferred stocks, and (snarkily) wondering if I should cash them in to pay off the house. Sadly, I get a number of people who say, "Of course! That'll reduce your monthly payments by $1300 a month--it's a no-brainer."
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Dwdonhoff:

JAFO: <<<I am going to disagree. IN the context of real estate, reciting that a property is financed implies a mortgage loan (and mortgae or deed of trust securing the loan. Think about contracts that contain a "financing contingency" versus contracts that are for cash (and without a fincing contingency). That diference would make no sense emplying your suggested definition of financing.>>>

"I agree with you in the context of real estate contracts. In the context of financial planning, all funds most leave their alternative accounts in order to be applied to real estate equity... and that is financing."

First, we aer on the buying a home board, so real estate contracts is the relevant topic. Second, I suggest that you are discussing opportunity cost, not financing.

<<<You definition implies that a home that is owned free and clear of any debt is still financed?>>>

"In the broader context of balance sheet planning, yes."

It is a small sample size, but no financial planner I have ever consulted had tried to make this distinction.

"The funds held in the real estate equity account are being held at the expense of the alternative equity accounts."

"At the expense of" is clearly a reference to opportunity cost.

I suggest that youare taking useful terms with standard definitions and conflating them in a way that makes them less useful rather than more useful. Because I generally like you, I will stop now.

Regards, JAFO
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JAFO,

I suggest that youare taking useful terms with standard definitions and conflating them in a way that makes them less useful rather than more useful.

I'd suggest you are missing the entire purpose of a functional grasp of English vocabulary. If you truly understand what I have explained, and you think there is a better way to express it, then dancing around the periphery isn't doing anyone any good.

You are not only free to restate the message accurately in whatever language you feel is more "standard"... if you are indeed able, and decline, you are taking that opportunity for learning away from those who show up precisely for that.

Stretching your traditional and comfortable vernacular is not conflation.

Because I generally like you, I will stop now.
I find this odd to state you'd be *less* forthcoming because of affection... is this a sincere practice of yours? Does it not strike you as perhaps a bit less honest?

Dave
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But my gut is screaming "No".

Thanks Peter. I suspected it would be more complicated than simply going for funding within the allowed time frame, but was curious.

IP
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you are taking that opportunity for learning away from those who show up precisely for that.

Hmmmm .... funny that's not the case on another board.
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Dwdonhoff:

<<<Because I generally like you, I will stop now.>>>

"I find this odd to state you'd be *less* forthcoming because of affection... is this a sincere practice of yours? Does it not strike you as perhaps a bit less honest?"

Perhaps your mother never suggested to you that when you do not have somethng nice to say, then it is better to say nothing, but since you asked, here goes.

In my experience, people who take standard terminology a conflate it or otherwise alter are often seeking to obfuscate, in a verbal "sleight of hand", to convince you to part with your money.

P.T. Barnum did with this was to Egress signs.

Robert Kiyosaki did through all his books. I guess he made a bunch of money from his books, but not from his claimed expertise in real estate.

See, e.g., http://www.johntreed.com/Kiyosaki.html

By you definition, everyone's whole life is financed.

You wrote, "all funds most leave their alternative accounts in order to be applied to real estate equity" but tht is simply a subset of the larger (also true) statement that "all funds most leave their alternative accounts in order to be applied to [any purchase]". Which then simplifies to it take money to live, which is true, but hardly advances the discussion about the question the OP raised.

When somebody strts using words in non-standard ways, I immediately reach to guard my wallet and start looking to locate the exits, because more likely than not what will follow is a pitch for soething I probably do not need at a price that is likely above any reasonable fair market value.

Regards, JAFO
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JAFO,

In my experience, people who take standard terminology a conflate it or otherwise alter are often seeking to obfuscate, in a verbal "sleight of hand", to convince you to part with your money.

If you've already forgotten the declared purpose of The Motley Fool, it is right up top your browser; 'To Educate, Amuse & Enrich.'

I teach concepts (you apparently have a hard time with... not a hard time understanding, I think... but a hard time accepting.) When I shake up your comfortable way of thinking with "non-standardized" language, this seems to really cause distress.

By you definition, everyone's whole life is financed.

Indeed, for financial intelligence purposes, this is an excellent concept to understand. I am glad you can see it as well.

When somebody strts using words in non-standard ways, I immediately reach to guard my wallet and start looking to locate the exits, because more likely than not what will follow is a pitch for soething I probably do not need at a price that is likely above any reasonable fair market value.

You're missing out, then, on intellectual opportunities. When I point out that how you manage your money should consider all of its costs, running away in fear of someone picking your wallet is hardly rational.

Pointing out that all major purchases are financed, regardless from a 3rd party or self-financed, is hardly an incredibly new message. I certainly didn't originate it... and I remember hearing it when I was just a kid beginning to learn about money myself.

In the upthread post, I wrote so the readers discover that losing $51,000 a year to 'save' perhaps $25-30,000 is not in their financial nor risk-management best interest. Yet this 'scares you' somehow?

Cheers,
Dave
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Dwdonhoff:

JAFO: <<<In my experience, people who take standard terminology a conflate it or otherwise alter are often seeking to obfuscate, in a verbal "sleight of hand", to convince you to part with your money.>>>

"If you've already forgotten the declared purpose of The Motley Fool, it is right up top your browser; 'To Educate, Amuse & Enrich.'"

I have not.

"I teach concepts (you apparently have a hard time with... not a hard time understanding, I think... but a hard time accepting.) When I shake up your comfortable way of thinking with "non-standardized" language, this seems to really cause distress."

Not only do I not have a hard time understanding, but I accept them as well. Opportunity cost is a well defined and well understtod term. What I object to is your "repackaging" (or merging) of well understood concepts into other well understood concepts.

<<<When somebody starts using words in non-standard ways, I immediately reach to guard my wallet and start looking to locate the exits, because more likely than not what will follow is a pitch for soething I probably do not need at a price that is likely above any reasonable fair market value.>>>

"You're missing out, then, on intellectual opportunities. When I point out that how you manage your money should consider all of its costs, running away in fear of someone picking your wallet is hardly rational."

I doubt that I am missing out on intellectual opportunities. I am regularly here on these boards, and I read plenty of other sources. Education is a life-long need. And I have no problem with an argument about considering all of the costs.

"In the upthread post, I wrote so the readers discover that losing $51,000 a year to 'save' perhaps $25-30,000 is not in their financial nor risk-management best interest. Yet this 'scares you' somehow?"

I do not recall any such particular point upthread 9and this has been a long thread), so you will have refresh my memory. I do know, however, that such point is exactly the one that Ray has been making to you while waiting for you spreadsheet about Indexed Universal Life Policies (IIRC). and that you have been arguing the other side of the question in that thread.

Regards, JAFO
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JAFO,

Not only do I not have a hard time understanding, but I accept them as well. Opportunity cost is a well defined and well understtod term. What I object to is your "repackaging" (or merging) of well understood concepts into other well understood concepts.

Why? That's one of the ways that people best learn.

What specifically do you have a problem with in regard to the concept that everything is financed?

I do know, however, that such point is exactly the one that Ray has been making to you while waiting for you spreadsheet about Indexed Universal Life Policies (IIRC). and that you have been arguing the other side of the question in that thread.

I haven't heard from anyone on that thread (you're referring to the 'retirement investing' board, I am assuming?) I'd put that in the ideological religion category with Political Asylum... same approaches to personal respect, reason and logic. But if you are saying somebody's sincerely open to learning there, I'll go check it out again.

Cheers,
Dave
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I haven't heard from anyone on that thread (you're referring to the 'retirement investing' board, I am assuming?) I'd put that in the ideological religion category with Political Asylum... same approaches to personal respect, reason and logic. But if you are saying somebody's sincerely open to learning there, I'll go check it out again.

Actually, on that board/set of threads, I would say that your position is closer to ideological religion. IUL propoonents have been asked multiple times to supply numbers that disprove Rayvt's numbers showing that over a period of at least 20 years, investing in the S&P 500 with dividend reinvestment, will result in a larger pot of money than investing in an IUL, with associated fees and caps. Over 2 months later, no numbers have been supplied by IUL proponents, only rhetoric and pitches about 'highly complex' Monte Carlo simulations, and how there is 'no risk' with IUL, vs. 'lots of risk' with the 'naked' S&P strategy.

Ray's numbers seem to prove that even if your view is that the 'naked' strategy is riskier is correct, the pot of money at the end is still smaller using the IUL. As Ray most recently showed (using actual numbers), over a 20 year period, the benefit of the 'no-loss' feature of the IUL is outweighed by the downside features of having the gains capped and higher fees. Unless you can prove with numbers that the IUL provides a bigger pot of money with the same amount invested over a 20 year period, your obsession with risk avoidance is what borders on religious, IMO.

And there still hasn't been any answer to the risk that was raised about the insurance company going belly up as a risk in your 'zero risk' IUL.

AJ
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I haven't heard from anyone on that thread (you're referring to the 'retirement investing' board, I am assuming?) I'd put that in the ideological religion category with Political Asylum... same approaches to personal respect, reason and logic. But if you are saying somebody's sincerely open to learning there, I'll go check it out again.

More than one person is waiting for your numbers. If need be, I can ask every day until you produce. This is the second time you've said you are not contributing because nobody seems interested. First time I've known for you to run from a discussion.

PSU
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Hi AJ,

Actually, on that board/set of threads, I would say that your position is closer to ideological religion.
Sure... like I said before, the phlebotomist is the wild-eyed heretic at the jehovah's witness conference. I get it... I'm "crazy" to those folks...

IUL propoonents have been asked multiple times to supply numbers that disprove Rayvt's numbers showing that over a period of at least 20 years, investing in the S&P 500 with dividend reinvestment, will result in a larger pot of money than investing in an IUL, with associated fees and caps.
I don't know about any otehr IUL proponents, but Ray's already conceded he can't outperform an IUL with the same safety and liquidity parameters, and I've already conceded that there are *lots* of ways to outperform an IUL when risk of loss is no question.

Over 2 months later, no numbers have been supplied by IUL proponents, only rhetoric and pitches about 'highly complex' Monte Carlo simulations, and how there is 'no risk' with IUL, vs. 'lots of risk' with the 'naked' S&P strategy.
I don't know about all that... must be on the boards since after my last visit. I'll try to go catch up.

Unless you can prove with numbers that the IUL provides a bigger pot of money with the same amount invested over a 20 year period, your obsession with risk avoidance is what borders on religious, IMO.
An IUL is not a reward-chasing vehicle, it is a 'capital mothership' that remains virtually unsinkable (versus all similar alternatives) and outperforms all similar alternatives. When you *want* to take risks, because the rewards outweigh the risks, you are free to pull out capital as a collateralized loan (lower loan costs than the principal gains) to do so without losing the compounding growth on the total principal.

There is no comparison with a naked S&P position that has random risks of up to 50% loss.

And there still hasn't been any answer to the risk that was raised about the insurance company going belly up as a risk in your 'zero risk' IUL.

If there is ever an environment where a statutory reserve IUL company goes belly up, *AND* the participating competitor companies if that state's guarantee associations are unable to pick up the existing client contract... the naked S&P account will have long prior been decimated.

Just as with hiking in bear country, there is no absolute safety... but there are ways to make sure you are safer than the hiker next to you (who ends up as the bear bait.)

Hi PSUE,

More than one person is waiting for your numbers.
Exactly *zero* have said so to me, other than you now.

If need be, I can ask every day until you produce. This is the second time you've said you are not contributing because nobody seems interested.
Right... and after the 1st time I answered several questions... and faced insulting personal attacks that were apparently highly popular among the board participants.

Why would anyone of real substance bother with that kind of mob?

First time I've known for you to run from a discussion.
Not running... ignoring. Again, 'phlebotomy to the JW's'...

But I'll give it one more shot.
Dave
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I don't know about any otehr IUL proponents, but Ray's already conceded he can't outperform an IUL with the same safety and liquidity parameters, and I've already conceded that there are *lots* of ways to outperform an IUL when risk of loss is no question.

Okay, let me try to put it simply......

Liquidity: For retirement funds (which is what the 'Retirement Investing' board is about), liquidity prior to retirement should not be an issue, because they are RETIREMENT funds. Not to be used for things like paying for college, new cars or vacation homes. So the 'liquidity' that you keep touting as a 'benefit' is really a downfall, because it allows people to draw down savings that are supposed to support them in retirement for other things, and may leave them without enough funds to actually retire on. And if something really bad, like a permanent disability, occurs, retirement funds can be pulled out of tax-deferred accounts without penalty.

Safety: The 'naked' S&P 500 strategy does have more volatility, with some pretty substantial losses probably 2 or 3 times during any particular 20 year timeframe. (And because we are talking RETIREMENT investing, the timeframes are long - generally at least a 20 - 30 year build-up period, and planning should be for at least a 20 - 30 year withdrawal period, so a 20 year period is actually on the shorter end.) But, as long as one stays the course, after any given 20+ year period, the pot of money from the 'naked' strategy will be more than twice as large as the pot of money from the IUL strategy, so even if there is a 50% loss in year 21, the 'naked' strategy still provides the retiree with more money for their retirement. And as the build-up timeframes get longer, the performance advantage for the 'naked' strategy increases. So, for the benefit of 'safety', one is giving up a substantial total return advantage.

Right... and after the 1st time I answered several questions... and faced insulting personal attacks that were apparently highly popular among the board participants.

But you keep saying you will provide data, and all you (and CC) ever provided were words. Again, that smacks of religion - believe what I say, you don't need to see numbers that prove it.

If there is ever an environment where a statutory reserve IUL company goes belly up, *AND* the participating competitor companies if that state's guarantee associations are unable to pick up the existing client contract... the naked S&P account will have long prior been decimated.

Tell that to the people whose annuities with Executive Life were cut by 50%, even after the state insurance funds and other insurance companies 'stepped in'. http://www.post-gazette.com/stories/business/news/broken-pro... And if AIG hadn't been bailed out during the financial crisis, I doubt that either the state insurance funds or other insurance companies would have been able to make AIG's IUL and annuity holders completely whole. And yet, a few short years after the financial crisis, the S&P has been hitting new record highs, so anyone who stayed the course has a bigger pot of money than they would have had if they put everything in an IUL.

Just as with hiking in bear country, there is no absolute safety... but there are ways to make sure you are safer than the hiker next to you (who ends up as the bear bait.)

But you were the one who kept trying to say that IULs would have 'no' losses. Then, when the possibility of a loss is pointed out, you backpedal and say 'there is no absolute safety'?

AJ
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And if AIG hadn't been bailed out during the financial crisis, I doubt that either the state insurance funds or other insurance companies would have been able to make AIG's IUL and annuity holders completely whole.

The AIG that was bailed out during the financial crisis had little to nothing to do with its consumer insurance division.

AIG had sold credit protection through its London unit in the form of credit default swaps (CDSs) on collateralized debt obligations (CDOs) but they had declined in value. The AIG Financial Products division, headed by Joseph Cassano, in London, had entered into credit default swaps to insure $441 billion worth of securities originally rated AAA. Of those securities, $57.8 billion were structured debt securities backed by subprime loans. As a result, AIG’s credit rating was downgraded and it was required to post additional collateral with its trading counter-parties, leading to an AIG liquidity crisis that began on September 16, 2008. The United States Federal Reserve Bank stepped in, announcing the creation of a secured credit facility of up to $85 billion to prevent the company's collapse, enabling AIG to deliver additional collateral to its credit default swap trading partners. The credit facility was secured by the stock in AIG-owned subsidiaries--[of which the consumer insurance division was one]--in the form of warrants for a 79.9% equity stake in the company and the right to suspend dividends to previously issued common and preferred stock. Source: Wiki

And yet, a few short years after the financial crisis, the S&P has been hitting new record highs, so anyone who stayed the course has a bigger pot of money than they would have had if they put everything in an IUL.

Hindsight is always 20/20. If, however, the S&P had gone in the other direction--and there're indications that it may yet--people who had their life savings in insured instruments such as IUL would be very glad indeed that they lost none of their nest egg.

If you think the S&P will continue an upward climb with no end in sight, then don't put your money in an IUL. If, however, you have serious doubts about the stock market's ability to resist reversals--perhaps several--AND you're nearing retirement age, an IUL is an appealing alternative, in my opinion, to the S&P.
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IUL proponents have been asked multiple times to supply numbers that disprove Rayvt's numbers showing that over a period of at least 20 years, investing in the S&P 500 with dividend reinvestment, will result in a larger pot of money than investing in an IUL, with associated fees and caps. Over 2 months later, no numbers have been supplied by IUL proponents, only rhetoric and pitches about 'highly complex' Monte Carlo simulations, and how there is 'no risk' with IUL, vs. 'lots of risk' with the 'naked' S&P strategy.

As you know, I'm an IUL proponent. I'm a proponent because no one knows what the market will do at the time it would be catastrophic to lose one's nest egg with no time to recover. If you're a youngster and have plenty of time to recover from losses in any period of the S&P 500, then go for it. If, however, you're nearing retirement, when one of the S&P 500's famous retrenchments would be catastrophic for you, then an insured instrument is a more attractive alternative, in my opinion.

BTW, I finally prepared a spreadsheet, but I don't know how to post it here without losing formatting. I frankly don't have time/don't care enough about posting it for my critics. In other words, I couldn't care less what critics think about my position re IULs.
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If need be, I can ask every day until you produce.

You intend to be obnoxious? Lovely. This is why wild horses couldn't make me produce my spreadsheet. You can just go pound sand.
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I haven't heard from anyone on that thread (you're referring to the 'retirement investing' board, I am assuming?) I'd put that in the ideological religion category with Political Asylum... same approaches to personal respect, reason and logic. But if you are saying somebody's sincerely open to learning there, I'll go check it out again.

I'm much more of a lurker on that board, but I have actually been checking pretty regularly looking for your numbers and analysis because IUL's are an area with which I am very unfamiliar, and so I was looking for all the data to be more educated and to understand if that would be something useful for us.

I realize you had a vacation in there, and so I'm sure had to do some catch-up, but as you've been posting on other boards now for a bit since returning, I've been disappointed not to yet see your take on the IUL's.

True or not, the impression that I have been left with is that you cannot disprove the case that Rayvt has made, and that is putting IUL's into that category in my mind where the product enriches the sales person and not the client, and should be avoided. I hear you saying this is not true, but I'm not seeing anything to back that up except loud proclamations that no one will listen anyhow. If there's a case to be made, I'd like to see it, but just declaring that anyone listening isn't really interested because they have already made up their minds seems silly and counterproductive to me, and unfortunately, it also leaves me with a tainted impression that I'm now using to filter everything you write. I don't think that is the desired response, and I have typically found your posts informative, although I do admit to getting lost in some of the longer ones, particularly when you seem to redefine words that I already thought I understood, but seem different in your analysis. I'd like to see less of that so that I could be better informed and educated with the information you have to share.
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True or not, the impression that I have been left with is that you cannot disprove the case that Rayvt has made, and that is putting IUL's into that category in my mind where the product enriches the sales person and not the client, and should be avoided.

There you go. Don't buy 'em.
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I don't know about any otehr IUL proponents, but Ray's already conceded he can't outperform an IUL with the same safety and liquidity parameters,

Um, no. After looking at the data, I have concluded that IULs suck. That as they are "protecting" you from normal ups and downs of the stock market, they are riffling your wallet.

More than one person is waiting for your numbers.
DD: Exactly *zero* have said so to me, other than you now.


No, he's right. A number of people have said that they want to see the numbers from proponents. CC claimed several of times that she was just a couple of days from posting data that would soundly prove the benefit of IULs. You've said you'd have data to counter my argument, too.

But so far, all we've gotten is hand-waving and words. (And CC left in a huff.)
The spreadsheet I built is publicly available. You are free to look at it and point out any errors or bogus assumptions. In fact, I welcome that. I find it difficult to believe that IUL perform so terribly bad in the long run. They couldn't possibly be that bad, could they? But I've gone over and over my calculations and I don't see any glaring bugs.

From what I see, IULs fail on their own terms. They are intended as a long-term investment, but they fall far behind the S&P in the long term. The *only* period-length they are superior is short-term, in limited circumstances.

To repeat: From what I see, IULs fail on their own terms.

I "concede" that IULs are superior in one particular set of circumstances. Which is in worst-case times(s) up to a period of about 15 years. For periods of longer than 15 years, even in the worst-case times, IULs were worse that B&H.
But on average, B&H beats IUL in every time-span, for a period-lengths from 1 year to 25 years.

I'm looking for somebody to show data that demonstrates that, no, IULs *do* succeed on their own terms. Just haven't seen it yet. No data, just narrative.

Right... and after the 1st time I answered several questions... and faced insulting personal attacks that were apparently highly popular among the board participants.
Unfortunately, CC poisoned the well for you.


Why would anyone of real substance bother with that kind of mob?
"On the internet, nobody knows you're a dog." Heck, nobody knows that I'm posting from my Mom's basement and running spreadsheets on a Commodore 64. ;-)
Thing is, POST DATA. SHOW THE MATH. Let them make personal insults to Excel for the way it added cell C4 to D32, and averaged column F12:F400.
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If there is ever an environment where a statutory reserve IUL company goes belly up, *AND* the participating competitor companies if that state's guarantee associations are unable to pick up the existing client contract... the naked S&P account will have long prior been decimated.

Tell that to the people whose annuities with Executive Life were cut ...


AJ, while this is indeed a finite risk, it's a very weak argument against IULs. The chances of this type of thing happening are minuscule. Weak arguments are generally better left unsaid; they detract from the strong arguments and hence weaken the overall case.
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BTW, I finally prepared a spreadsheet, but I don't know how to post it here without losing formatting.

Dropbox. It's free and you don't have to install anything on your computer. Dave posted a sign-up link at one time. Here's a signup link: http://db.tt/x2EHtQHU
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You intend to be obnoxious?

No more than your 90 posts on the Atheist board. Oops, I forgot. You NEVER posted 90 times in a month on the Atheist board.
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AJ, while this is indeed a finite risk, it's a very weak argument against IULs. The chances of this type of thing happening are minuscule. Weak arguments are generally better left unsaid; they detract from the strong arguments and hence weaken the overall case.

Actually, the fact that there is a finite risk, miniscule though it might be, is a strong argument against the "There is NO risk with an IUL" and "IULs are COMPLETELY safe" positions that have been touted by IUL proponents. Trying to sell a product as 'NO risk' product, when there is, indeed, some level of risk, is disingenous at best. People who decide to buy IULs need to be aware that they are buying into a single company risk as part of their 'riskless' strategy.

AJ
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There you go. Don't buy 'em.

So you are confirming that my impression is correct? I would have thought from the all the discussion that you would have thought my impression was incorrect, and would have provided some data to correct it.

My general problem with this discussion is that I have only seen data on one side of the story, and I keep looking/waiting for the data on the other side, but so far, I'm just seeing emotional arguments, and that's what is giving me my impressions.

But yeah, you are right that at this point, these are not something I would buy given the data I have seen to date.
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CC claimed several of times that she was just a couple of days from posting data that would soundly prove the benefit of IULs. You've said you'd have data to counter my argument, too.

Not gonna do it. You can go pound sand, too. Obnoxious gets zero.
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You NEVER posted 90 times in a month on the Atheist board.

That's correct.
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So you are confirming that my impression is correct?

No. I'm saying that your 'tude disqualifies you from buying them. It even disqualifies you from discussing them.
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No. I'm saying that your 'tude disqualifies you from buying them. It even disqualifies you from discussing them.


You know, I don't really think that I'm the one with the "'tude," as you call it. You might consider looking into a mirror to find that person. And then I would agree with the entire statement as I believe that your 'tude disqualifies you from discussing them.
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AJ, yes, that's true.

When I was extending my spreadsheet to show the rolling N-year returns, I was startled when I saw that the "no loss, ever" IUL actually had a worst-case of -1.5% loss for the rolling 1-year term.

Then I realized, DUH!! That's the years when the S&P had a loss, you got saved by the floor at 0%, but you *still* get socked by the IUL fees. 107 of the 740 rolling 1-year periods had a loss, when you factored in a 1.5% annual fee. That's 14% of the periods.

Betcha never heard _that_ from an IUL proponent. I suspect that they overlook it due to mental accounting -- mentally, the fees are accounted for as a different bucket, and independently of, the investment returns.

Similar to the time at work when they froze raises because the company had a bad year, but they spent money to convert a grass field to a nicely landscaped patio. When we exclaimed about the disconnect, the answer was, "Those are two different budgets, and have nothing to do with one another." As if it wasn't all the same company.

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

BTW, Dave, et. al. ---- I don't have a dog in this fight. I don't invest in either IULs or S&P500, neither B&H or timed. Likewise, I don't invest in Covered Calls. Or Whole Life Insurance. I cannot envision EVER using any of these strategies.

I'm kinda wondering if IULs will ever become like Variable Annuities. I remember when those were touted as superior, but nowadays everybody and his brother writes about how bad and fundamentally flawed they are.

My interest in this is strictly intellectual. I just loaded historical data into a spreadsheet and attempted to duplicate the strategy's rules, to see what the real historical data shows, and to compare that with the claims being made.

It's great being retired and having plenty of time on your hands to amuse & entertain yourself. ;-)
We're headed off to another cruise this weekend -- 2 weeks visiting St. Petersburg, Stockholm, Helsinki, etc. Got another (longer) one booked later this year. I got a HUGE check from my rewards credit-card! What's in my wallet is a Fidelity/AMEX cash rewards card -- 2% back, paid in cash every month, automatically deposited in my Fidelity account. Although we finally broke down and just got a CapitalOne card for the no foreign transaction fee.
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CC claimed several of times that she was just a couple of days from posting data that would soundly prove the benefit of IULs. You've said you'd have data to counter my argument, too.

Not gonna do it. You can go pound sand, too. Obnoxious gets zero.


What is this -- third grade playground?

I thought that Joe McCarthy killed the "I have here in my hand a list (but I'm not going to show it to you)..." type of argument back in 1950. I can't believe that people are still trying to pull it. Do you really think anybody is going to buy it?
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Actually, the fact that there is a finite risk, miniscule though it might be, is a strong argument against the "There is NO risk with an IUL" and "IULs are COMPLETELY safe" positions that have been touted by IUL proponents. Trying to sell a product as 'NO risk' product, when there is, indeed, some level of risk, is disingenous at best. People who decide to buy IULs need to be aware that they are buying into a single company risk as part of their 'riskless' strategy.

There is also the risk the policy itself goes bust. That happened with fair regularity back when regular UL policies were popular. There is another risk too, in that the commissions and fees are front loaded. One policy I looked had a 5% front load. So, it isn't true there is a solid floor. You start off with a -5% loss. I guess that isn't a risk exactly, because you know you are losing the money but it is definitely a loss.

However, the main risk is the one Dave was talking about earlier: Opportunity cost. Ray showed at after the end of 20 years or whatever, a simple buy and hold strategy simply steamrolls the IUL. You wind up with vastly more money. While you were putting money in a poorly performing IUL, you were missing out on far more attractive investments.
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You know, I don't really think that I'm the one with the "'tude," as you call it. You might consider looking into a mirror to find that person. And then I would agree with the entire statement as I believe that your 'tude disqualifies you from discussing them.

Read your own statement. From the git-go, you accused a fellow board member of practically fleecing your pocket. You disgust me.
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My interest in this is strictly intellectual. I just loaded historical data into a spreadsheet and attempted to duplicate the strategy's rules, to see what the real historical data shows, and to compare that with the claims being made.

I explained why I purchased an IUL. At this point in my life, I'm not willing to possibly withstand the decimation of my assets via another S&P wipe-out--which famous wipe-outs have occurred numerous times during the history of the S&P under discussion.

From the obnoxious reactions here from stock market know-it-alls--all of whom are geniuses in hindsight--you'd think I had sold my first born child to finance my retirement. Pfffft!
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What is this -- third grade playground?

Since you act like a playground bully, that's right. That's essentially what we've got here.
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People who decide to buy IULs need to be aware that they are buying into a single company risk as part of their 'riskless' strategy.

I am not a fan of IULs, but there is protection up to the limits set by your state. Insurance companies are required to keep assets to back the policies. These assets can't be used to keep the company afloat. The assets are sold, often to another insurance company. If the assets are insufficient, then your state's guarantee fund is used to make up the difference.

The bankruptcy of Executive Life showed the good and bad. Bond holders lost a significant amount of their investment. Policies weren't terminated, but neither did they continue with the same cost structure. Fees were significantly increased.
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vkg, thanks for pointing out the reserve requirements of life insurance policies, a structure I don't think is duplicated in any other product or market.

The bankruptcy of Executive Life showed the good and bad. Bond holders lost a significant amount of their investment. [But then they're bond holders, not insureds.] Policies weren't terminated, but neither did they continue with the same cost structure. Fees were significantly increased.

I had read somewhere that not a single beneficiary of an Executive Life life insurance policy holder had a claim for benefits denied. Indeed, as insureds die, those claims are being paid off in full even now. I had not heard until it was posted here that annuities didn't fare as well.

The bottom line is the decimation of one's assets isn't nearly as universal in insured market participation as in naked market participation. With respect to the gyrations of the S&P 500, it becomes a matter of "Are ya feelin' lucky?"

The riddle is similar to the question: will a borrower pay less over time with an ARM or with a FRM? Well, when are you taking out the ARM or the FRM? Timing is everything.

It's funny...some will decry any adverse position against S&P market gyrations/decimation but will preach like evangelists about FRMs as nearly always the right choice. Go figure.
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I am not a fan of IULs, but there is protection up to the limits set by your state.

Yes, it works until it doesn't. As long as your state covers variable insurance products with the insurance fund, and your account balance is below the insurance limit, and the insurance fund doesn't run out of money, it will work.

Howver, not all states cover variable insurance products (like IULs) with their insurance funds, or if they do, there can be some caveats.

Additionally, if we are talking about 20 (or more) years of accumulations in an account, it is quite possible that the account balance will be in excess of state insurance fund limits, which can be as low as $100k.

The bankruptcy of Executive Life showed the good and bad. Bond holders lost a significant amount of their investment. Policies weren't terminated, but neither did they continue with the same cost structure. Fees were significantly increased.

And 15% of annuity customers had their annuity payment amounts decreased, some by more than 50%. If IULs had been widely sold at that time, IUL account holders in excess of their state insurance fund limits would have taken a haircut, too.

AJ
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2 gifts:

I'm much more of a lurker on that board, but I have actually been checking pretty regularly looking for your numbers and analysis because IUL's are an area with which I am very unfamiliar, and so I was looking for all the data to be more educated and to understand if that would be something useful for us.

Well said. I also followed the discussion on that board from the beginning. Like you, I was reading to be informed on the benefits of an IUL. Dave did have a vacation during the midst of the thread, and then never really picked back up. My end impression: continous dollar cost averaging over a long period of time into an S&P500 index, and then using a SWR of say 4% easily outperforms an IUL.
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I am fascinated by how different people approach risk.

It's funny...some will decry any adverse position against S&P market gyrations/decimation but will preach like evangelists about FRMs as nearly always the right choice. Go figure.

I too have noticed that the people on these boards who accept the risk of the market over long time periods often favor FRMs, while those who in the past favored ARMs now like IULs to avoid market risk. I would like to understand this correlation better.

For myself, it is about compartamentalizing risk. My FRM protects me from the risk that rising intrest rates will increase my house payment, allowing me to take other risks elsewhere. The ability to refinance allows me to take advantage of falling rates when they occur. Dave seems to be saying that IULs eliminate some risks, allowing one to take other risks elsewhere, but frankly, I find Dave's explanations hard to follow. So he too is talking about compartamentalizing risk.

P.S. I too would like to see the spreadsheets. I would like to understand when IULs are the right product.
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And 15% of annuity customers had their annuity payment amounts decreased, some by more than 50%. If IULs had been widely sold at that time, IUL account holders in excess of their state insurance fund limits would have taken a haircut, too.

AJ


Limits do vary widely by state. My state, California, has one of the lowest limits. I hadn't ruled out at some time considering a SPIA. The low limit on coverage is additional concern.
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The riddle is similar to the question: will a borrower pay less over time with an ARM or with a FRM? Well, when are you taking out the ARM or the FRM? Timing is everything.

It's funny...some will decry any adverse position against S&P market gyrations/decimation but will preach like evangelists about FRMs as nearly always the right choice. Go figure.


Timing is everything. The current low rates on FRMs make ARMs not that interesting. Even so, there are those that ARMs could be appropriate. There are many different loan products, and a variety of tolerance for the risk of rising payments.

I still feel that the pick-a-payment loan with qualification based on the lowest possible payment (that resulted in negative amortization) is a bad product.
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My end impression: continous dollar cost averaging over a long period of time into an S&P500 index, and then using a SWR of say 4% easily outperforms an IUL.

It depends on what you're going to do with your contributions to the account.

If all you're going to do is stick the money in an IUL or stick the money in an S&P500 fund and don't disturb it for 30-35 years, then, yes, the naked S&P500 will do better; that is, it will accumulate more money--but not much more money--in a narrow way. But you'd better not have a need for cash, in all that time, for either catastrophic life events or just opportunities that only cash can fulfill.

An IUL is capable of more sophisticated leveraging strategies and lifestyle opportunities than a plain 'ol S&P500 retirement acccount. No one has ever claimed that an IUL alone, without exploiting those opportunities, or using the cash to avoid ruinous catastrophic costs, would outperform straight investing in the S&P500.

For example, let's say your granddaughter needs life-saving experimental treatment that isn't covered by insurance. Are you going to liquidate your S&P500 retirement fund to help her? Of course you are, but you'll suffer mightily after she recovers. With an IUL, you would take out a loan while your principal continues to grow. (Dave, correct me if I'm wrong.)

(At this point, I should mention Rayvt, the same guy who does serial 30 FRMs at full LTV in order to stay liquid. It’s either one belief or the other--not both selectively as his need to be right directs.)

Another quick example: a couple years ago (during the last 50% S&P500 drawdown) I know someone who bought a $230,000 condo for $140,000 because he could write a check on his IUL. That’s a 65% return on his cash--before you even consider the cashflow yield from rents, which was over 8% before the rent markets began increasing! Does this get added to the yield of an IUL? It should--that's where the money came from!

No...the naked S&P500 as a foundational buy and hold (relying on it for your full balance sheet) is playing Russian roulette, all for the potential long term upside of just 10-13%. None too smart, I'd say.

To invest in a naked S&P500 fund, you must have the willingness to forego huge upside opportunities during the S&P down cycles. When the majority have decimated accounts, huge opportunities arise for those who are still whole. If you're not at all interested in that, then plugging away with an S&P500 account--pay no attention to that shrinking account behind the curtain--is a no brainer. Comparing the S&P500 side-by-side with an IUL, without taking into account the myriad opportunities to exploit the insured nature of an IUL--is simply not accurate.
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Like you, I was reading to be informed on the benefits of an IUL.

But you don't want to be FULLY informed on the benefits of an IUL. Your mind simply shuts off.
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Dave seems to be saying that IULs eliminate some risks, allowing one to take other risks elsewhere.

That's exactly what Dave is saying, in my opinion.
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I still feel that the pick-a-payment loan with qualification based on the lowest possible payment (that resulted in negative amortization) is a bad product.

I didn't particularly like it either, and originated only one. The customer is still in the loan and loving it for the time being.
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If all you're going to do is stick the money in an IUL or stick the money in an S&P500 fund and don't disturb it for 30-35 years, then, yes, the naked S&P500 will do better; that is, it will accumulate more money--but not much more money--in a narrow way. But you'd better not have a need for cash, in all that time, for either catastrophic life events or just opportunities that only cash can fulfill.

That's clearly not true. A simple buy and hold not only accumulates more money than the IUL, it accumulates vastly more money. Let's go back to the original example of $10,000 initial + $100/month starting in 1975.

Now, let's say you have a catastrophic life event in 2002, right at the worst possible time for buy and hold, and at the time when the IUL provides maximum protection.

If you went the IUL route, you have $200,000 you can borrow against.

If you went simple B&H you have $500,000 that you can do whatever you want with.

Same thing with the 87 crash. B&H still beat the IUL. There actually are some periods when the IUL outperforms, but they are short and simply get lost after any reasonable period of time.
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... stick the money in an S&P500 fund and don't disturb it for 30-35 years, then, yes, the naked S&P500 will do better; that is, it will accumulate more money--but not much more money ...

Maybe we have different concepts of what constitutes "much more".
30 years, 1975 to 2005, S&P $880K IUL $193K
35 years, 1975 to 2010, S&P $1.2M IUL $251K

30 years, 1980 to 2010, S&P $670K IUL $181K

To me an extra $687K, $950K, or $490K seems "much" more.

Indeed in 2008 the S&P account got hit bad, the 1980 start dropped from $606K down to $300K. Yikes! Whereas the IUL was rock steady and went from $170K to $176K.

But, um, $300K is more than $176K.

should mention Rayvt, the same guy who does serial 30 FRMs at full LTV in order to stay liquid.
Huh???? Not even close. Where did you get than idea?
I do serial refi's at 80% LTV in order to get a lower interest rate and extend the term for a new 30 years. I never do a cash-out mortage, either -- it's always rate & term.
And liquidity is a complete non-issue unless I decide to buy an island.
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Another quick example: a couple years ago (during the last 50% S&P500 drawdown) I know someone who bought a $230,000 condo for $140,000 because he could write a check on his IUL. That’s a 65% return on his cash--before you even consider the cashflow yield from rents, which was over 8% before the rent markets began increasing! Does this get added to the yield of an IUL? It should--that's where the money came from!

How is this different than putting the mutual funds/ETF in a margin account, and borrowing against it?
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Hi All,
I've been swamped with client work & am on a strict maximum 30 minte/day TMF diet ;~) So bear with me while I try to hammer out responses inline in a long scrolly answer;

AJ;
"Retirement funds" are what are left over when you stop taking a paycheck... that's the only distinction. They are not some separate account that you "never touch" because they are all your money until you need it for income when you no longer work.

Liquidity is mandatory, its not optional.
If your only access to liquidity is selling decimated positions, you are S.O.L.

If you have to draw income in a declining market by selling positions, you get the worst of reverse dollar cost averaging.

If you have to draw cash to cover uninsured catastrophic demands during a drawdown, you get kicked while you are down and lose a leg at the same time.

If you are blocked out from exploiting "unfair investment opportunities of a lifetime" that occur when the market is down & others are losing their legs... because the market is down and *YOU* are "waiting it out" to regain your own lost leg.. you've lost the deals of a lifetime.

Safety: The 'naked' S&P 500 strategy does have more volatility, with some pretty substantial losses probably 2 or 3 times during any particular 20 year timeframe. (And because we are talking RETIREMENT investing, the timeframes are long - generally at least a 20 - 30 year build-up period, and planning should be for at least a 20 - 30 year withdrawal period, so a 20 year period is actually on the shorter end.)

This is *REAL* simple to explain in a way I trust you will finally understand;

GIVEN: It is financiall faster to eliminate your mortgage liabilities by accumulating your cash in a compounding growth account separate from paying down the mortgage itself.

Question; Which is the more suitable of 2 options:
a) A naked S&P position?
b) An IUL?

Virtually everyone here at BOSAH agrees that putting the money that equals the safety of the home you sleep in and raise your family in should *NEVER* be put at a 50% risk of loss.

Why would anyone think the certainty of their income when they can no longer work is any less critical? Especially when they are given full freedom to take risks *BY CHOICE* when they want to?

But you keep saying you will provide data, and all you (and CC) ever provided were words.
I'll still post up some illustrations & spreadsheets, but it may be awhile yet. Again, PSUE only mentioned yesterday that anyone was actually interested.

It is critical to note, however;
A) There is no contest between the naked S&P500 & an IUL. You cannot ignore the risks of ruin in one, in order to compete against the safety of the other.
B) Ray already conceded he can't come up with *anything* that performs better than the IUL with the same features.
C) I have already conceded that there are *MANY* ways to outperform an IUL when risks of loss are not an issue.

And yet, a few short years after the financial crisis, the S&P has been hitting new record highs, so anyone who stayed the course has a bigger pot of money than they would have had if they put everything in an IUL.
Not if they couldn't afford to "stay the course" because of financial distress they couldn't overcome when the markets were down.

Not if the hedged account holders were able to exploit opportunities yielding 50-150% because they had access to cash that wasn't lost, when the distressed sellers of the opportunities were bleeding out of their wallets.

But you were the one who kept trying to say that IULs would have 'no' losses. Then, when the possibility of a loss is pointed out, you backpedal and say 'there is no absolute safety'?

THIS is what I mean by "religion." I have repeated over & over that IULs have no risk of *MARKET* loss. They are still subject to systemic risks... but they are less exposed to systemic risks than *any* naked securities position.

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

Hi 2 gifts,

True or not, the impression that I have been left with is that you cannot disprove the case that Rayvt has made,
Ray's yet to address the risks of ruin, as far as I know. So far the best he's done is wave his hands in the air & say "it doesn't matter, it doesn't matter... as long as you never sell the losses aren't real." Of course, that's exactly correct... *EXCEPT* for those who are forced to sell.

It is also a failure for everyone who is presented with opportunistic exploits when everyone else is down in the naked markets.

and that is putting IUL's into that category in my mind where the product enriches the sales person and not the client, and should be avoided.
Actually, this is true... for *EVERY* financial strategy that doesn't fit the user.

Its equally true for hucksters that pitch dangerous strategies in a religious fervor that they don't even make a dime from pitching... but which leave bodies on the fields when danger arises.

I hear you saying this is not true, but I'm not seeing anything to back that up except loud proclamations that no one will listen anyhow. If there's a case to be made, I'd like to see it, but just declaring that anyone listening isn't really interested because they have already made up their minds seems silly and counterproductive to me, and unfortunately, it also leaves me with a tainted impression that I'm now using to filter everything you write.
You seem to be sliding down a slippery path that is far more dangerous to you than anyone else.

Here's the simple case;
1) The key to ending up with the most money is not losing it in down markets so you can exploit the up markets. This is 'trading 101.' It is no different in small to big numbers, or short to long time frames.

2) Catastrophe happens. You *MUST* plan for it, even if the odds of occurence are low, as the rate of devastation may be very high.

3) Never miss an unfair deal/trade/exploit, *ESPECIALLY* due prior unplanned loss exposures. The 'insider deals' that present themselves 4, 5, 6 times a lifetime can by themselves often represent 80% or more of your longterm gains. This is another chapter of 'Trading 101' and applies regardless how many zeros immediately left of the decimal point, or how many pages on the calendar.


I don't think that is the desired response, and I have typically found your posts informative, although I do admit to getting lost in some of the longer ones, particularly when you seem to redefine words that I already thought I understood, but seem different in your analysis. I'd like to see less of that so that I could be better informed and educated with the information you have to share.

Many times the things you think you are certain you understand need to be "re-set" (wouldn't you agree? I know this is true for me as well.)

Often the best way to do that is to shock the system by forcing an obvious truth to be viewed from a different but perfectly valid angle.

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

Ray,
But so far, all we've gotten is hand-waving and words. (And CC left in a huff.)
The spreadsheet I built is publicly available. You are free to look at it and point out any errors or bogus assumptions. In fact, I welcome that. I find it difficult to believe that IUL perform so terribly bad in the long run. They couldn't possibly be that bad, could they? But I've gone over and over my calculations and I don't see any glaring bugs.


I'll admit I have only glanced throught hem so far. How have you accounted for risk of ruin?

Without that, all the analysis so far is meaningless for comparison purposes.

BTW, Dave, et. al. ---- I don't have a dog in this fight.
<SNIP>
My interest in this is strictly intellectual. I just loaded historical data into a spreadsheet and attempted to duplicate the strategy's rules, to see what the real historical data shows, and to compare that with the claims being made.
It's great being retired and having plenty of time on your hands to amuse & entertain yourself. ;-)


I sincerely hope this means that when I dig in I *AM* going to see the effects of random catastrophic costs, or missed 2-3-bagger opportunities during down years...

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

Hi SykeSix,

Hang with me... I'm actually going to support one of your points;

There is also the risk the policy itself goes bust. That happened with fair regularity back when regular UL policies were popular.
That's actually a risk of poorly designing the plan in the first place. If its properly designed for conservative funding with the barest minimum death benefit required by the IRS for the tax benefits, the risks of lapse are extremly low. How low is that, you ask... so low that the insurance companies themselves guarantee against it with their own reserves for contract holders older than 70 (during the years they would normally be consistently drawing out loans, which could begin to get near the area of balance where the risk of lapse is possible.)

There is another risk too, in that the commissions and fees are front loaded.
Actually, that's not a risk, that's an absolute.

One policy I looked had a 5% front load.
Quite standard actually... but that 5% front load is one time only. Building the same performance in the markets on a DIY basis with new money (not accumulated positions) would have costs along the lines of 2% to 2.5% each and every year... so a one-time 5% hit (on an apples-to-apples basis) is a very low cost.

BY THE WAY... to add to your concern... the upfront loads are not the ONLY charges within an IUL (though they are certainly the highest.) There are sundry other nickel & dime fees (I call them junk fees) along with the mortality costs of the minimized death benefot as well.

All together, on a well-designed case, the 20+ year total costs, all inclusive, dip under 1% (often well under.) This for the safe "capital carrier" performance that would cost 2-3 times that on a self-done basis in securities.

So, it isn't true there is a solid floor. You start off with a -5% loss. I guess that isn't a risk exactly, because you know you are losing the money but it is definitely a loss.
OH... ITS MORE THAN THAT! The initial year, due to the accounting of all the initial one-time charges, could be up into the teens or higher even. They key however is the fact that they are ONE TIME charges... and even if you calculated the opportunity costs on those funds "lost" due to the up front charges, after avoiding risks of ruin you are still better off hedging.

However, the main risk is the one Dave was talking about earlier: Opportunity cost. Ray showed at after the end of 20 years or whatever, a simple buy and hold strategy simply steamrolls the IUL. You wind up with vastly more money. While you were putting money in a poorly performing IUL, you were missing out on far more attractive investments.

What's the latin term for "repeating previous references"? "Ibid"?

Whenever I see the willing blindness of catastrophic ruin, or missed exploits in down markets for lack of equity, I'm just going to type "IBID' from here forward.

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

Hi AJ,

Howver, not all states cover variable insurance products (like IULs) with their insurance funds,

IULs are not considered "variable insurance" family, but rather they are regulated in the 'Fixed Insurance" world. Its a significant difference.

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

Hi crackdclaw,

My end impression: continous dollar cost averaging over a long period of time into an S&P500 index, and then using a SWR of say 4% easily outperforms an IUL.
IBID

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

Hi Spinning,

I too have noticed that the people on these boards who accept the risk of the market over long time periods often favor FRMs, while those who in the past favored ARMs now like IULs to avoid market risk. I would like to understand this correlation better.
THANK YOU FOR THINKING, AND ASKING!!!!!!

For me, the 2 considerations fit hand-in-glove.

The strategy of using a 5 yr ARM at a 35%-45% interest discount, and banking that difference in a side compounding account gives a guaranteed advantage over the 30 FRM for 7-10 years in the WORST case interest rate environment, which probably has odds of occuring deep into the single digits... arguably less than even a 1% chance (for anything near a catastrophic interest rate rise causing the 5 year to *ONLY* outperform the 30 FRM for *MERELY* 7-10 years.

In other words, the odds of overpaying on the 30 FRM, and thereby over-extending how long a person is to remain in debt, is likely 99% or more greater than the 5 yr ARM and grow the difference strategy.

IN CONTRAST, the odds of complete financial ruin by building your entire financial foundation on a naked securities position with regular random 30-50% drawdowns... all in pursuit of 10-13% returns... immediately appears foolhardy on its very face. *STILL*... that is without comparing it to what the alternatives may be. If the alternatives were even riskier, or even drearier in actual eventual returns, then maybe the 50% risks for 13% gains bet might be the best in town.

But its not.

You can build your own position over time, or in the immediate run buy a retail position from an IUL, that gives you the ability to build a financial foundation with zero market loss risks, and a longeterm net/net average rate of return of 6-8% tax-free.

Further, this position is collateralizable at an interest cost that is typically 1-3% *LESS THAN* the principal growth rate.

In a short-run opportunity (or catastrophic ruin avoidance,) the funds can be pulled without decimating the position of the principal, and life can be managed. uninsured medical bills can be paid that might have caused others to collapse... and real estate, or businesses, or intellectual property assets, can be acquired at 50%, 30%, or much lower on the dollar.

In the long-run, the positive arbitrage pays for the internal costs of the entire contract in later senior years when tax-free income is peeled out as interest-bearing loans.

REMEMBER I mentioned you can build your own hedged position? Its true and very doable (and in fact its how I have positioned my own overall balance sheet.) My overall household notional net worth *CANNOT* lose value in down markets (not even the non-insurance parts.) My accumulated real estate portfolio mimics what the IUL companies do with bonds... but at higher net yields to my own position.... and I can put "the casino's money" (the yields only, not principal) at highly leveraged risk to generate 150-300% returns with bull call debit spreads.

I am not saying IULs are the only way to do this... not at all! I am showing how to do this with or *WITHOUT* an insurance company. Its just easier to initially get the benefits without building your own safe yield portfolio by piggybacking on the internal general account yield paid by the IUL companies.

P.S. I too would like to see the spreadsheets. I would like to understand when IULs are the right product

Any spreadsheets will only be valid if/when they incorporate the effects of catastrophic risk of ruin during down markets, and the loss of low risk/high reward exploits during down markets.

Ray's the spreadsheet champ with retirement time to burn... so we'll see if he can model that (or maybe he already has?)

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

Hi vkg,

I still feel that the pick-a-payment loan with qualification based on the lowest possible payment (that resulted in negative amortization) is a bad product.
Its a *HORRENDOUS PRODUCT*... for people who can't or won't manage their cashflows.

I've got 3 of them... and even after they hit their recast point (where they've now begun amortizing involuntarily on the shorter remaining payoff period,) the interest rates are consecutively (last time I checked) 0.6% (yes, under 2/3 of 1%,) 0.875%, and 1.75%... and they are all on my rental properties, which supports a very nice yield in the rising rental rate markets!

BOTTOM LINE THOUGH... they were overwhelmingly sold by loan officer that didn't understand them, pitching features that should only be used carefully, to borrowers who not only didn't understand them but often bought them for all the wrong reasons.

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

Hi sykesix,


That's clearly not true. A simple buy and hold not only accumulates more money than the IUL, it accumulates vastly more money

Not if you are forced to liquidate when the market is down, and
Not if you count the lost gains from the deals you can't take when the market is down.

Let's go back to the original example of $10,000 initial + $100/month starting in 1975.
Why not roll the dice again & start in '73?
http://stockcharts.com/freecharts/historical/spx1960.html
What if you need that non-FDA rated surgery for your kiddo in '75?
What if your law firm partner is caught with a hooker and you have the opportunity to buy him out at 20 cents on the dollar (thanks to his non-lawyer wife)?

What if you didn’t start with $10,000, but $100,000 proceeds from an inheritance, home or business sale in 73?
How about you start in ’81 and need access in 83?
Start in 2000, and need access in 2003? 2009?

Smart investment management treats every dollar the same, risk-wise… adding or subtracting zeros on the right side never changes prudent risk management strategy. If you wouldn’t put your entire net worth of $1M at a risk of 50% loss, you should never put your entire net worth of only $1,000 at that risk either.
The most dangerous time to have new money in a naked S&P position is when it is at or near all-time highs…
Where are we now?

Same thing with the 87 crash. B&H still beat the IUL.
Nope; IBID

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

Hi VKG,

How is this different than putting the mutual funds/ETF in a margin account, and borrowing against it?
Its actually conceptually very similar... I point this out all the time so folks can much more quickly wrap their heads around how it works.

The differences are;
IUL; 90% access
Securities: 50% max... 30% functional

IUL; fixed interest rates available, from 5-6%
Securities; Floating rates relative to indexes

IUL; non-callable, and no call risks due to market drops
Securities; Callable at any time, and especially sensitive to market drops

IUL; after age 70 the IUL company will guarantee no lapse, (the functional risk equivalent of a margin call in securities.)
Securities; no guarantees of any kind whatsoever.

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

OK... I have definitely burned wayyy beyond my time budget for today (damn... actually that was yesterday, and I've burned way over 45 minutes into today/tomorrow too...)

I probably won't be around TMF tomorrow much, if at all... but I *WILL* get back to Retirement Investing to see if there is any better comprehension over there yet, and if not i'll do what I can.

Good night, and all the best to everyone!
Dave Donhoff
Leverage Planner
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First, thanks for taking the time to reply to my post as well as the others. That certainly did help me to understand a bit more, and I can see some of the places where we don't necessarily disagree as much as perhaps have different priorities and different assumptions or approaches.

If your only access to liquidity is selling decimated positions, you are S.O.L.

This is a big assumption, at least in my mind. It seems to say that your only funds available are your investments, whether those are retirement funds (and I am in the camp that I consider those only for retirement, but I would touch them for a disaster) or funds in an IUL. I am a very big proponent of having a significant efund, and that's where money would come from first in the case of a disaster. That said, I have been out of work for extended periods of time including for a year when my kids were in college, and we still had enough in our efund to not have to change our standard of living and to continue paying their tuition. So for me, I have other ways that I am addressing liquidity, and touching retirement savings (or in my case, the kids' college funds would have been first) is a last-ditch effort, and I have enough other options I could tap first.

GIVEN: It is financiall faster to eliminate your mortgage liabilities by accumulating your cash in a compounding growth account separate from paying down the mortgage itself.

Question; Which is the more suitable of 2 options:
a) A naked S&P position?
b) An IUL?

Virtually everyone here at BOSAH agrees that putting the money that equals the safety of the home you sleep in and raise your family in should *NEVER* be put at a 50% risk of loss.

Why would anyone think the certainty of their income when they can no longer work is any less critical? Especially when they are given full freedom to take risks *BY CHOICE* when they want to?


I might be reading this incorrectly, but I don't see putting my house at risk if I choose to invest the dollars over and above my mortgage payment in something, whether that be the S&P, individual stocks, an IUL, or even just parked in a bank account collecting interest. That is money intended to pay it off faster, not pay it as I go, and so I don't see this as a risk to losing my house. I see it as a risk that I might not pay it off as fast as I would like, but losing the investments does not put my mortgage payment at risk, which comes out of cash flow. I see this as mixing apples and oranges, but again, I am not completely sure that I am reading it correctly.

It is also a failure for everyone who is presented with opportunistic exploits when everyone else is down in the naked markets.

You've referred to the ability to take advantage of terrific investment opportunities several times, and I think perhaps where we differ here is that although I find that attractive, it is not a driver for my behavior. I have reached all of my financial goals ahead of schedule, including having bumps along the way like no income for up to a year multiple times, and I've done that without pouncing on those terrific investment opportunities because I am happy with having enough, and I don't necessarily need to have a ton more than that. I prefer to spend my time elsewhere than always looking for the next great financial victory provided that I have enough, and I've always had that.

This concept might actually be what's coloring my view of this whole discussion, but I think it is important to note that people are driven by different motivators, and that is why I want to understand IULs better and when they might be appropriate. Given the data, I can then decide if my personal criteria and situation is appropriate to some investment strategy including an IUL.

Actually, this is true... for *EVERY* financial strategy that doesn't fit the user.

I absolutely agree with this.

Here's the simple case;
1) The key to ending up with the most money is not losing it in down markets so you can exploit the up markets. This is 'trading 101.' It is no different in small to big numbers, or short to long time frames.

2) Catastrophe happens. You *MUST* plan for it, even if the odds of occurence are low, as the rate of devastation may be very high.

3) Never miss an unfair deal/trade/exploit, *ESPECIALLY* due prior unplanned loss exposures. The 'insider deals' that present themselves 4, 5, 6 times a lifetime can by themselves often represent 80% or more of your longterm gains. This is another chapter of 'Trading 101' and applies regardless how many zeros immediately left of the decimal point, or how many pages on the calendar.



This explanation actually helps me a lot to understand where you are coming from. First, I don't particularly care if I end up with the most money. I only care that I end up with enough money to meet my needs and financial goals. I think that is a huge distinction here.

Secondly, I have planned for catastrophe to happen, and I've had to make use of those plans more times than I care to remember, but as long as I have a way to cover those catastrophes, I think I'm OK. I think we can probably agree that there are multiple options to cover a catastrophe, and that an IUL or any other insurance product is not the only answer.

And as I've stated above, I am not driven at all by your 3rd point because I only need to have enough. Plus, my risk tolerance may not be suitable to those opportunities, and knowing myself and my own risk tolerance is a good thing so that I can do things like sleep at night.

What if you didn’t start with $10,000, but $100,000 proceeds from an inheritance, home or business sale in 73?
How about you start in ’81 and need access in 83?
Start in 2000, and need access in 2003? 2009?


I think efunds need to be set aside no matter the investing strategy to cover such events. At least that has been my approach, and I do know that not everyone does that.

Again, thanks for taking the time for the detailed response as it helps me to understand where our priorities or approaches might differ, and I can use that to better understand what you are trying to explain.
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See, Dave? There's a "yabbut" for every insight and explanation you give. Some people just don't like any strategy where another person will earn a commission. They'll find everything wrong with it, even if it's an inherently safe product. There's just no way a strategy could be beneficial if someone is getting paid to tell them about it. Give up, buddy. The S&P500 is their god.
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Wow. And you think that I'm the one with the 'tude??

Whatever.
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Wow. And you think that I'm the one with the 'tude?? Whatever.

Whatever, indeed. There will be nothing Dave can say that you won't come back with a yabbut. Watch.
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Wow. And you think that I'm the one with the 'tude?? Whatever.

Whatever, indeed. There will be nothing Dave can say that you won't come back with a yabbut. Watch.

Oh, so it's okay for you to dispute/question what another poster says, but when another poster disputes/questions what you or Dave says, it's considered a 'yabbut'?

And you are accusing the other poster of having more 'tude than you?

Where is it that I can get another irony meter? Cuz mine is beyond repaair.....

AJ
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Oh, so it's okay for you to dispute/question what another poster says, but when another poster disputes/questions what you or Dave says, it's considered a 'yabbut'?

Depends, of course, on why the poster is disputing a statement.

When the stated reason is that the poster (in this case Dave) is wrong because he earns a commission on his advice, wouldn't you call that a case of shooting oneself in the foot? Take the commission out of the equation--or at least have the wisdom to shut up about it--and evaluate the strategy strictly on the merits of the strategy. That's what smart people do, in my opinion, instead of being instantly suspicious because someone may make a buck.
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See, Dave? There's a "yabbut" for every insight and explanation you give. Some people just don't like any strategy where another person will earn a commission. They'll find everything wrong with it, even if it's an inherently safe product. There's just no way a strategy could be beneficial if someone is getting paid to tell them about it. Give up, buddy. The S&P500 is their god.

I guess you don't understand the concept of discussion and debate.
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When the stated reason is that the poster (in this case Dave) is wrong because he earns a commission on his advice, wouldn't you call that a case of shooting oneself in the foot? Take the commission out of the equation--or at least have the wisdom to shut up about it--and evaluate the strategy strictly on the merits of the strategy.

You are the only one who harps on "making a commission".
Nobody on any of these IUL threads has said that IULs are bad because Dave or CC get paid a commission.

In fact, I actually said that I AM NOT BOTHERED that Dave/CC gets a commission. At worst, what people have said is that the saleperson's viewpoint is colored by the fact that he gets a commission, and that is appropriate to take into account when evaluating their proposal. After all, nobody expects a Toyota salesman to recomment buying a Ford.

I don't recall even once saying anything negative about a commission. And the spreadsheet I posted publicly for anyone to see and download certainly doesn't have commission or load anywhere in it.

CC, you are continually putting words in people's mouth and then taking umbrage about the words you yourself put there.
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You are the only one who harps on "making a commission". Nobody on any of these IUL threads has said that IULs are bad because Dave or CC get paid a commission.

Here's the post that racked up quite a few reccs--more than most in this thread, as a matter of fact. To this poster, Dave has not disproved Rayvt's case to the poster's satisfaction, so it must be that Dave is merely trying to enrich himself. Indeed, because Dave would get paid, there could not possibly be any merit to what Dave is saying. It is this 'tude to which I responded. The poster tried to cover his contempt but was unsuccessful, in my opinion. But that's what discussion boards are sometimes--vehicles to adroitly deliver insults.

[quote] True or not, the impression that I have been left with is that you cannot disprove the case that Rayvt has made, and that is putting IUL's into that category in my mind where the product enriches the sales person and not the client, and should be avoided. I hear you saying this is not true, but I'm not seeing anything to back that up except loud proclamations that no one will listen anyhow. If there's a case to be made, I'd like to see it, but just declaring that anyone listening isn't really interested because they have already made up their minds seems silly and counterproductive to me, and unfortunately, it also leaves me with a tainted impression that I'm now using to filter everything you write. I don't think that is the desired response, and I have typically found your posts informative, although I do admit to getting lost in some of the longer ones, particularly when you seem to redefine words that I already thought I understood, but seem different in your analysis. I'd like to see less of that so that I could be better informed and educated with the information you have to share. [quote]
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Hi 2Gifts,

You're welcome, and glad I brought the conversation out of the quagmire.

If your only access to liquidity is selling decimated positions, you are S.O.L.
This is a big assumption, at least in my mind. It seems to say that your only funds available are your investments, whether those are retirement funds (and I am in the camp that I consider those only for retirement, but I would touch them for a disaster) or funds in an IUL. I am a very big proponent of having a significant efund, and that's where money would come from first in the case of a disaster.
So am I. In my practice I have found that 6 months of cash to cover 1/2 year of all inclusive lifestyle costs is about the right number, if you can also keep ready revolving credit worth an additional 6-12 months of lifestyle burn rate.

If you keep more than 6 months cash on hand you are unecessarily restricting your household net growth... eespecially when you have an IUL, since it is liquid within a 1-3 day turn time.

Its a nice notion to mentally segregate an account that is "off limits"... but that firewall becomes irrelevant when loved ones are at risk, or other unforeseen and unimagined ruinous scenarios arise.

I might be reading this incorrectly, but I don't see putting my house at risk if I choose to invest the dollars over and above my mortgage payment in something, whether that be the S&P, individual stocks, an IUL, or even just parked in a bank account collecting interest. That is money intended to pay it off faster, not pay it as I go, and so I don't see this as a risk to losing my house.

Excellent! You are advanced beyond many. Many people unecessarily inject more cash into their real estate accounts (either via larger than minimum down payments, shorter than available amortization terms, or voluntary equity transfer via early repayments) because they've fallen into the mistake of believing they are somehow 'sfer' or eliminating their net liabilities faster by doing so (both of which, of course, are wrong.)

I see it as a risk that I might not pay it off as fast as I would like, but losing the investments does not put my mortgage payment at risk, which comes out of cash flow. I see this as mixing apples and oranges, but again, I am not completely sure that I am reading it correctly.

Oh no, you read it perfectly correctly... and you have the far more responsible and accountable perspective on the mortgage management issue. The vast majority (even otherwise sophisticated investors) have a visceral fear of debt... even when the numbers are so skewed in favor of using it in a well managed fashion.

You've referred to the ability to take advantage of terrific investment opportunities several times, and I think perhaps where we differ here is that although I find that attractive, it is not a driver for my behavior. I have reached all of my financial goals ahead of schedule, including having bumps along the way like no income for up to a year multiple times, and I've done that without pouncing on those terrific investment opportunities because I am happy with having enough, and I don't necessarily need to have a ton more than that. I prefer to spend my time elsewhere than always looking for the next great financial victory provided that I have enough, and I've always had that.
This *almost* sounds as though you are telling me that you are fortunate enough to be wealthy enough to have no further fear of losing equity, nor of accumulating more for either yourself, your heirs, or your personal contributions. Am I understanding you correctly? (And if so... wow! I wanna rub your hem!)

This explanation actually helps me a lot to understand where you are coming from. First, I don't particularly care if I end up with the most money. I only care that I end up with enough money to meet my needs and financial goals. I think that is a huge distinction here.

That's an amazingly mature & centered perspective, in my opinion! Money is nothing but the power of accumulated time... and it costs time to accumulate/multiply... so unless we discover some kind of immortality pill, exerting effort to accumulate more than we need for our purposes is inefficient of the very limited living time we are each given.

Secondly, I have planned for catastrophe to happen, and I've had to make use of those plans more times than I care to remember, but as long as I have a way to cover those catastrophes, I think I'm OK. I think we can probably agree that there are multiple options to cover a catastrophe, and that an IUL or any other insurance product is not the only answer
Absolutely! In fact, I don't look at an IUL from the perspective of problem solutions as much as a form of balanced strategy. And even at that, its just a ready-to-wear retail form of the strategy that can be custom fit "off the rack" rather than building it out yourself (which is also doable, and recommendable... for those so inclined (but not required of all, or any really.))

And as I've stated above, I am not driven at all by your 3rd point because I only need to have enough. Plus, my risk tolerance may not be suitable to those opportunities, and knowing myself and my own risk tolerance is a good thing so that I can do things like sleep at night.
I suspect you misunderstood what I mean by "an unfair deal/trade/exploit." When I refer to these, I am talking about deals where a dollar today buys you $1.50 to $3 (or more) of immediate resellable face value assets, which also throw off a very significant yield as well. Generally speaking, these are the 'golden chalice' lifetime deals of extremely *LOW* risk, matched with extremely *HIGH* reward.

Catherine referred to a 'friend' who bought a condo of immediate $230,000 value by stroking a $140,000 check... all because the securities markets were devastated so cash investors were absent, and the mortgage market was blocked out because the condo association was still wrapping up a litigation issue. That 'friend' was me. My immediate net asset cashflows were over 8% and have been rising along the way. The HOA won the litigation, and is pouring the proceeds into further enhancement upgrades to the overall property, and a mini-bidding war is on for this complex, driving my position up strongly (both in face value and rental yields.) This was an extremely low risk, high reward trade that I was able to execute when nobody else was, because I could stroke a check from my hedged account that didn't lose a dime.

I have a handful of stories of similarly "unfair" deals that have nothing to do with real estate (medical device deals, intellectual property deals, legal partnership buyouts, and like that) where hedged account owners were able to walk away with a steal, and have the seller virtually kissing them for saving the day with cash (albeit pennies on the dollar) when no other 'heros' were anywhere to be found.

Its amazing (but no longer surprising to me) how the "needle in a haystack" deals actually find their way to YOU... when you have cash to employ when everyone else is bleeding in the markets.

In *ANY* case... anyone with a low risk threshold would be wise to avoid *ANY* kind of securities long-term buy and hold scheme. Carrying the risk of waking up any morning to a 50% loss, in trade off of pursuit of a 10-13% average return, is laughable to the serious and tragic to the ignorant.

Again, thanks for taking the time for the detailed response as it helps me to understand where our priorities or approaches might differ, and I can use that to better understand what you are trying to explain.
It's my pleasure! (And I don't know what crawled up my good friend Catherine's butt... and we've had a few words about it on the back channels. ;~)

Your post was wonderful to me... as you may observe in these threads, your reasonings are not common. I appreciate that, and you!

Dave Donhoff
Leverage Planner
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After all, nobody expects a Toyota salesman to recomment buying a Ford.

You may not expect it, but a good sales person cares more about you getting what you need and not just a few bucks to get them through the week. In the long run, their reputation for putting their client first will get them more clients than convincing someone to buy what they don't need. It's a harder short term survival strategy, but a long term winner.

I've personally done this in more than one sales job, and will always give my Toyota dealership first shot at my repeat business because of their coming right out and telling me that there are some things you are better off doing elsewhere for equal quality and lower price.

IP,
admittedly no longer in sales, much to do with not wanting to bother to battle the preconceived notion that all sales people are slime
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admittedly no longer in sales, much to do with not wanting to bother to battle the preconceived notion that all sales people are slime

Not all are slime, but there are enough slimy sales people that consumers need to be careful and there are just bad sales people.

I believe we did a good job in selecting a real estate agent. I will not regret the commission that will be paid. She has earned it. I have been watching mlslistings. A similar property came on the market a couple of days ahead of our listing. Their agent makes me appreciate my agent.

Sales employees exist to bring in revenue. Unless they also provide the customer with a product that fits the customer needs and is "competitively" priced, the company isn't going to succeed. Cost isn't just purchase price. Quality, service and other soft items are included in the "pricing".

My department reviews some sale quotes. Most of the time, it is answering specific questions. On occasion, the answer is that we must walk away because what is being proposed isn't going to work and there is no way it can make it work.

There is can be a conflict that sales people are compensated for selling products that are profitable to their company. When the compensation package isn't in alignment with company goals, the results are bad for the company. When the compensation is significant, sales people are be motivated to sell the product. The customer has to be very careful whether the product being recommended is for the advantage of the sales person or customer.
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After all, nobody expects a Toyota salesman to recomment buying a Ford.

Hey, remember "Miracle on 34th Street?" That's what Macy's did for Gimbel's!

http://www.youtube.com/watch?v=lKfBUUhFueI

Dave, you should be recommending a naked S&P500 strategy via Vanguard! Screw the risk!
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Not all are slime, but there are enough slimy sales people that consumers need to be careful and there are just bad sales people.

Sure, just as there are bad people in every walk of life, and I've discussed a few of the slimier sales strategies. However, it is also a bit of a self fulfilling prophecy. If most people believe sales people are slime, they will drive the good people out of the market.

I posted on the Building/Maintaining a Home board yet another fantastic experience where someone was honest enough to tell me to buy elsewhere. It is not an uncommon experience for me.

And there are bad customers. I fired one client with $800,000 cash to spend on real estate because what he wanted me to do in negotiations compromised my values, even though it was OK by my broker. (She's since been fired.) That commission would have been lovely, but I have to live in this community and with myself.

IP
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Sure, just as there are bad people in every walk of life, and I've discussed a few of the slimier sales strategies. However, it is also a bit of a self fulfilling prophecy. If most people believe sales people are slime, they will drive the good people out of the market.

Bingo.
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aj485: Actually, on that board/set of threads, I would say that your position is closer to ideological religion. IUL propoonents have been asked multiple times to supply numbers that disprove Rayvt's numbers showing that over a period of at least 20 years, investing in the S&P 500 with dividend reinvestment, will result in a larger pot of money than investing in an IUL, with associated fees and caps. Over 2 months later, no numbers have been supplied by IUL proponents, only rhetoric and pitches about 'highly complex' Monte Carlo simulations, and how there is 'no risk' with IUL, vs. 'lots of risk' with the 'naked' S&P strategy.


This is off topic for this thread, but...the other day my wife and I were discussing pros and cons of annuities and I told her that I remembered reading something recently on the Fool boards that compared an investment in an annuity to an investment in the S&P 500. I think it may be the chart by Rayvt that I was thinking about.

Do you have a link to that thread?

skorthos
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See, Dave? There's a "yabbut" for every insight and explanation you give. Some people just don't like any strategy where another person will earn a commission. They'll find everything wrong with it, even if it's an inherently safe product. There's just no way a strategy could be beneficial if someone is getting paid to tell them about it. Give up, buddy. The S&P500 is their god.


I've now read both this thread and the one on the other board on this subject. I have absolutely no dog in this fight because while I Likely would not choose these products for myself, my folks are invested in them and I think it works perfectly for them based on their goals, risk tolerances etc...

All that said, what I find most interesting about these arguments is that one side seems to stick to pretty much to the numbers and supports their statements with data, spreadsheets and numbers while the other side responds only via narrative and anecdote.

While that's probably a fairly effective retail sales approach, it doesn't win many fact based intellectual arguments.
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All that said, what I find most interesting about these arguments is that one side seems to stick to pretty much to the numbers and supports their statements with data, spreadsheets and numbers while the other side responds only via narrative and anecdote.

You have the numbers. Rayvt claimed that the S&P500 would yield millions (plural) but the number of millions changed over time.

I fold. ;-)
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You may not expect it, but a good sales person cares more about you getting what you need and not just a few bucks to get them through the week. In the long run, their reputation for putting their client first will get them more clients than convincing someone to buy what they don't need. It's a harder short term survival strategy, but a long term winner.

All of life is about sales. Or at least a lot of it is. If you apply for a job you are selling yourself. Same for asking for a raise. Or asking someone to marry you. Even if you don't want to be in sales...you're in sales.

One would hope that a given sales person is putting their clients needs first, but as we know that isn't always true. Certain industries, car sales for example, have poor reputations for good reason. Therefore you must always do your own due diligence. Doubly so if discussion becomes sales talk.

On the flip side, being in sales (we're all sales) the clients I value the most are the ones who do their due diligence. They come engaged, they ask good questions, I enjoy the client meetings, I feel like I do my best work for them. The guys who say "just handle it!" are the ones I worry about.
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aj485: Here's a link to the initial post in the thread that started the discussion:
http://boards.fool.com/Message.aspx?mid=30608331

And here are links to the initial post in some spin-off threads:
http://boards.fool.com/Message.aspx?mid=30615891
http://boards.fool.com/Message.aspx?mid=30617228
http://boards.fool.com/Message.aspx?mid=30621110
http://boards.fool.com/Message.aspx?mid=30628463
http://boards.fool.com/Message.aspx?mid=30628530
http://boards.fool.com/Message.aspx?mid=30632019
http://boards.fool.com/Message.aspx?mid=30635088


Great!

Thank you.

(Actually, I told my wife, "I don't remember where I read this...but aj will know.")

Excuse me for a few days...I have some reading to do.

skorthos
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This is off topic for this thread, but...the other day my wife and I were discussing pros and cons of annuities and I told her that I remembered reading something recently on the Fool boards that compared an investment in an annuity to an investment in the S&P 500. I think it may be the chart by Rayvt that I was thinking about.

Intercst's website has some of the best discussion of annuities I've seen anywhere:


http://www.retireearlyhomepage.com/annuity_costs.html
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GIVEN: It is financiall faster to eliminate your mortgage liabilities by accumulating your cash in a compounding growth account separate from paying down the mortgage itself.
This premise is incorrect. The reason to put that money into *anywhere but* the house is for safety and liquidity. Liquidity is obvious. Safety perhaps not so obvious. It's because if you get foreclosed on, the bank keeps all that extra principal you paid.

Question; Which is the more suitable of 2 options:
a) A naked S&P position?
b) An IUL?

Here you go using nonstandard terminology again, attempting to smuggle in a concept. The correct answer is "A) a long (note: not "naked". long) S&P position.

Virtually everyone here at BOSAH agrees that putting the money that equals the safety of the home you sleep in and raise your family in should *NEVER* be put at a 50% risk of loss.
This is incorrect, and in fact contradicts a major (and correct) theme you harp on. All your money & assets are is just one big pool. It's not separate pools, it must be considered as an entirety. This is why you declined to answer a question I privately posed to you a couple of years back. You said that you couldn't even give a hypothetical answer without taking all our financial assets into account.

Anyway, the "pay off the mortgage early" account has nothing to do with "safety of the home". It's merely the money you are planning to use to pay off the house EARLY. Even if you lose 100% of it, the house is not in jeopardy -- only the paying off early.

=============================
You cannot ignore the risks of ruin in one, in order to compete against the safety of the other.
I'm not sure what you mean here.
If the S&P500 drops to ruin, then there is no insurance company in the world that will survive the circumatance that caused the ruin.

B) Ray already conceded he can't come up with *anything* that performs better than the IUL with the same features.
You keep saying that. This is like a Toyota salesman saying that there is no better car that has the features of having the letters AOTY in the name.

Here's the exactitude of what I say: The features that make an IUL attractive come with a cost that is far more than those features are worth.

The "more that it's worth" is an opinion.
The difference in final value and withdrawable amount, of the time-frame under discussion (20-30-40 years) is not an opinion. It's data that comes from the spreadsheet of *actual* historical s&P500 price & dividends.

==============
Not if they couldn't afford to "stay the course" because of financial distress they couldn't overcome when the markets were down. ... Not if the hedged account holders were able to exploit opportunities yielding 50-150% because they had access to cash that wasn't lost, when the distressed sellers of the opportunities were bleeding out of their wallets.

You and CC keep saying that. You talk about the 50% drawdown, but IGNORE what I've shown - that the cut-in-half S&P account value is *more* than the IUL account value.
This is becoming frustrating.

====================
Ray's yet to address the risks of ruin, as far as I know. So far the best he's done is wave his hands in the air & say "it doesn't matter, it doesn't matter... as long as you never sell the losses aren't real." Of course, that's exactly correct... *EXCEPT* for those who are forced to sell.
That's funny. Is there somebody else posting here with the name "ray"?
Because I -- posting as rayvt -- have mentioned the two ~50% drawdowns that happened since 1999 in just about every post. And show them QUITE PLAINLY in the charts I first posted and in the spreadsheet I posted.
I've NEVER said the drawdowns don't matter. What I HAVE said is that -- using the dates and deposits that you yourself proposed -- that the S&P account at the very bottom of the drawdowns was substantially larger than the IUL account.

And, of course, the losses ARE real. Only an ignorant beginner or a charlatan says that the loss isn't a loss as long as you don't sell.

==================
The key to ending up with the most money is not losing it in down markets so you can exploit the up markets.
Actually, the key is making the right trade-offs.
The key positive feature of an IUL, is the floor which guarantees that you'll never lose money.
But this comes along with a cap, which places a limit on your gain in an up market.
The historical data shows quite clearly that the cap hurts you more than the floor helps you.

This was detailed in this post: http://boards.fool.com/Message.aspx?mid=30709406

Another key to ending up with the most money is to not leave money on the table. The key *negative* feature of an IUL is that dividends are excluded.
That's about 3.25% a year that the S&P B&H account gets which the IUL account doesn't.
3.25% compounded for 20 or 30 years is a lot of money.

A IUL has a built-in drag of the annual fees of around 1.5%.
A S&P has a built-in boost of the dividends, of around 3.25%.

That's a built-in differential of about 4.75% in favor of the S&P. That's a very large burden to overcome.

=================
2) Catastrophe happens. You *MUST* plan for it, even if the odds of occurence are low, as the rate of devastation may be very high.
Don't be silly. People insure for reasonable risks, not for every possible devastating thing that could happen.

=================
The 'insider deals' that present themselves 4, 5, 6 times a lifetime can by themselves often represent 80% or more of your longterm gains.
I have no idea what you are saying here. Are you suggesting insider trading? That opportunity doesn't present itself even once in a lifetime to normal people. And the people who do do it often wind up in jail. Ask Martha Stewart.

Let's see what a real trader has to say.
"You need to trade like a casino – probability based, with no particular outcome required of any one trade.
3. You will never know when a trade will be a winner in advance, only that the conditions that define your edge are present.
4. Your edge is nothing more than a higher probability of one thing happening over another. Your edge is no guarantee of a winning trade, just of winning over time." -- Mark Douglas

=======================
Many times the things you think you are certain you understand need to be "re-set" (wouldn't you agree? I know this is true for me as well.)

Often the best way to do that is to shock the system by forcing an obvious truth to be viewed from a different but perfectly valid angle.

Absolutely!!

======================
How have you accounted for risk of ruin?
See next post.
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======================
How have you accounted for risk of ruin?
Without that, all the analysis so far is meaningless for comparison purposes.
...
Ray's the spreadsheet champ with retirement time to burn... so we'll see if he can model that (or maybe he already has?)


I'm not sure what you mean by "risk of ruin". Surely you aren't trying to define it as "works differently than an IUL", are you?
Lots of people tend to equate volatility with risk, but that's simply wrong. Volatility is not risk.

Here's what Warren Buffett said:
"The riskiness of an investment is the probability – the reasoned probability – of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period."

That bit about "contemplated holding period" is quite important. I get the feeling that youse guys keep shifting the length of the contemplated period. IULs are intended for long term, not short term. But you keep coming up with examples of short-term deficiencies of S&P vs. IUL. From an FAQ on IULs: "IUL is a long term investment strategy, so not appropriate for short term needs. Just like short term investments don’t look good in the long term, long term investments don’t perform as well in the short term."

My spreadsheet lets you use whatever historical dates and whatever length of period you want. You originally asked for starting in 1975, accumulate for 28 years (to 2003) and then begin withdrawals.
I just add a feature to count the number of months where the IUL account had a higher value than the S&P account. In the 456 months from Jan'75 to Jan'13 that number was ZERO.

Even with the occasional 50% loss in the S&P500 index, the S&P account was ahead of the IUL account 100% of the time.

'course, that's a time where the S&P had many years to grow before a market crash -- so that's not a good check for "risk of ruin".

There was a big crash in 1987. Black Monday. The S&P got hit for a -22% loss in October 1987. For somebody who started in Jan'87, they took the full brunt of that -22% Oct'87 loss. Jan'87 to Jan'13 is 26 years or 312 months.
In those 312 months, Jan'87 to Jan'13, the IUL account was ahead of the S&P account 10 times. The S&P was ahead 312 times.

Another case, the 20 years Jan'93 to Jan'13. Twenty years is on the low side of what I'd consider to be "long-term".
Of those 240 months, the IUL was ahead 33 times and the S&P was ahead 207 times. The worst difference was Feb'09, where the S&P account was $12,300 behind the IUL.
The S&P account value was $41,700 and the IUL account was $54,000.

The above is focussing on risk of ruin aspects.
But now ....
the ending account values -- the account value on Jan'13 ....

The 1993 start (20 yrs): IUL = $84K S&P = $105K
The 1987 start (26 yrs): IUL = $136K S&P = $225K
The 1975 start (30 yrs accum & 10 yrs withdrawals): IUL = $7K S&P = $937K
(Note: not a typo. The IUL was $280K with a loan balance of $272K, for a net value of $7K)

=====================
Oops, I just got down to Dave's remark about 1973. Here 'tis:
Jan'73 to Jan'13
$10,000 initial + $100/mo
# of months where IUL was ahead: 70
# of months where S&P was ahead: 410
Largest amount S&P was behind IUL: $4,839 (Mar'74. S&P: $7,200. IUL: $12,100)

Values at the end of 1975 (Jan'76 .. 3 years after start):
IUL: $14,190
S&P: $12,404
Amount IUL is ahead: $1,786
That additional $1,786 is not going to make a difference in the affordability of a non-FDA surgery.
Oh, wait, surrender charges. What's the typical surrender charge for the 3rd year of a IUL policy? 5%? That brings the IUL down to $13,480, or $1076 ahead.

In the early years, you just haven't built up much value whether in an IUL or the S&P. $10K + $100/mo just doesn't add up very fast. Compounding starts off slow in the early years.

Let's say your law partner only gets caught with a kilo of meth after your account has had time to grow. 10 years isn't long enough. The IUL is $29K -- that's not going to buy out a valuable law firm even at 20 cents on the dollar. Around about 15 years is when we start to get into serious money. The IUL is at $49K. The S&P is at $94K. Note that the S&P has about twice as much money as the IUL.

So, okay, he bribes the DA and gets off, so you don't get that cut-rate price on the law firm. The account continues onward for 30 years, to Jan 2003.
IUL value: $144,000
S&P value: $503,000

Using the IUL to avoid the paper loss of $4839 caused you to leave $360,000 on the table.

======================
How about you start in ’81 and need access in 83?
Start in 2000, and need access in 2003? 2009?

You're screwed. Either way.
You've dedicated the money to a long-term investment but you handled it as short-term. You put short-term money in short-term investments (read: T-Bills or CDs). You don't put short-term money in long-term investments.

The term for unexpectedly needing to do an early withdrawal from a long-term investment is S.O.L. Also: "why didn't you have an efund?"

The most dangerous time to have new money in a naked (sic. proper terminology is "long") S&P position is when it is at or near all-time highs.

Hey, you know that chart you just linked to? http://stockcharts.com/freecharts/historical/spx1960.html
You know what I see? Viewed, as you said up above, from a different but perfectly valid angle.
I see a chart full of new all-time highs. I see a chart where, no matter what date I pick, the price 20 years later is higher. Every single peak that stands out from the following valley ----- that peak is lower than the price 20 years later.

The angle I'm looking from is the stated duration of a IUL -- long-term, 20+ years. The angle that you are talking about is short-term -- 2 years, 3 years, 9 years.

=======================
I sincerely hope this means that when I dig in I *AM* going to see the effects of ... missed 2-3-bagger opportunities during down years
Heh, now you're switching gears. That's okay. Up above you've been focussing on the risks -- which is indeed one of the first things to look at. Now you're focussing on the reward side. Good. The next most imporant thing to look at.

But puzzling. The implications of what you pose is that a person who is firmly set on avoiding stock market risks & volatility -- which is why he is in the IUL in the first place. This volatility-fearng person is going to pull money out of his safe, steady IUL after the market has taken a huge loss, and put it in the market? Take money out of his safe IUL and put in into a naked S&P position? Right after he's seen months of TV news shows about all the people who got crushed and wiped out when the market tanked? This person is suddenly going to embrace the stock market?
That that just doesn't happen.

In an IUL you don't get any 2- or 3- baggers. Your gain is chopped off at 12%.

Oh, you do get a 4-bagger. From 1973 to 2013 your total deposit was $58,000, and the IUL's final value is $261,000.
But the S&P account has a final value os $1,032,000. Which is a, like, 17-bagger.

As far as your law partner and your opportunity with his hooker/meth .... well, I guess we can hypothesize that anything can happen. I doubt that many Financial Advisors discuss such a scenario with their clients. ;-)
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Ahhhh, I've upgraded the spreadsheet again.

https://www.dropbox.com/s/cbzvg74iyeyfwt6/SPX-monthly-1950-2...

At this point, about the only thing it doesn't have is a stepped decline of the IUL fee.
Easy enough to add in, but an unnecessary refinement. Even pegging it as low as 25 BPS doesn't make the IUL better than the S&P.
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WARNING: Long scrolly Q&A response...

GIVEN: It is financiall faster to eliminate your mortgage liabilities by accumulating your cash in a compounding growth account separate from paying down the mortgage itself.
This premise is incorrect. The reason to put that money into *anywhere but* the house is for safety and liquidity. Liquidity is obvious. Safety perhaps not so obvious. It's because if you get foreclosed on, the bank keeps all that extra principal you paid.


And this is precisely why the premise is CORRECT as well. If you lose your equity you have delayed your mortgage (and or overall liability) elimination. You just said the exact same thing, with additional description.

Question; Which is the more suitable of 2 options:
a) A naked S&P position?
b) An IUL?

Here you go using nonstandard terminology again, attempting to smuggle in a concept. The correct answer is "A) a long (note: not "naked". long) S&P position.
'Naked' is standard financial terminology.
http://www.investopedia.com/terms/n/nakedposition.asp
If you are uncertain about financial terms, I encourage the use of www.Investopedia.com

Virtually everyone here at BOSAH agrees that putting the money that equals the safety of the home you sleep in and raise your family in should *NEVER* be put at a 50% risk of loss.
This is incorrect, and in fact contradicts a major (and correct) theme you harp on.
No, the *statement* is correct (that virtually everyone here (save a very small minority, including you & me) believe that sending more money to the mortgage bank is safer/less costly, and anything less is more dangerous/expensive.
... and we both agree that the premise is incorrect.
... *AND* among those willing to sit on the fence, the thought of losing the money they have outstanding from a mortgage is usually terrifying.

You cannot ignore the risks of ruin in one, in order to compete against the safety of the other.
I'm not sure what you mean here.
If the S&P500 drops to ruin, then there is no insurance company in the world that will survive the circumatance that caused the ruin.

Again, if unsure of financial terms, consult the financial web;
http://www.investopedia.com/terms/r/risk-of-ruin.asp

Here's the exactitude of what I say: The features that make an IUL attractive come with a cost that is far more than those features are worth.
The "more that it's worth" is an opinion.

<SNIP>
You talk about the 50% drawdown, but IGNORE what I've shown - that the cut-in-half S&P account value is *more* than the IUL account value.
This is becoming frustrating.

You're probably frustrated because the cherrypicking is failing you. You chose (or stumbled) on a starting date at the lowest point that could be found. Go back just 2 years to '73, and get forced to partially liquidate in '75, and you're singing an entirely different story.

Same for the other high-entry, low-liquidation periods I pointed out last night.

What I HAVE said is that -- using the dates and deposits that you yourself proposed -- that the S&P account at the very bottom of the drawdowns was substantially larger than the IUL account.
Heh... only for funds fortunate enough to have been deposited at a low enough prior period. Contributions above the drawdowns are subject to their losses.

Blindly riding a naked buy & hold *IS* a form of market timing... by ignorance. It is willfully praying that the one bullet in the 6 chambers won't be rolled "up" on the next trigger pull... and then praying again it won't be on the *NEXT* pull... then again on the NEXT.

There are better ways than carrying 30-50% loss risks in pursuit of a 10-13% potential gain.

And, of course, the losses ARE real. Only an ignorant beginner or a charlatan says that the loss isn't a loss as long as you don't sell.
Glad we agree here.

Actually, the key is making the right trade-offs.
The key positive feature of an IUL, is the floor which guarantees that you'll never lose money.
But this comes along with a cap, which places a limit on your gain in an up market.

It *ONLY* limits your gain if you never use your principal (usually during the deep market sell-offs) to take advantage of high-reward-low-risk exploits.

If you are happy ignoring the massive winners available to the cash-endowed during the down markets (and you don't have to go looking for them... when you have the cash in the down markets, the opportunities are looking for you,) then maybe the 50%-downside-for-13%-upside *IS* the best you can do.

The historical data shows quite clearly that the cap hurts you more than the floor helps you.
The historical data is missing the most important benefits to the IUL;
1. avoiding catastrophic financial ruin due to non-lost principal,
2. exploiting high-reward-low-risk opportunities when everyone else is desperate for cash from the sell offs.

The 'insider deals' that present themselves 4, 5, 6 times a lifetime can by themselves often represent 80% or more of your longterm gains.
I have no idea what you are saying here. Are you suggesting insider trading?
Yes, but not insider trading of exchange-traded securities. There is *NEVER* an advantaged deal in anything exchange traded (at least not if it has any depth of activity at all.)

I detailed out a few examples above;
Desperado real estate deals.
Desperado business acquisition & control deals.
Professional partnership takeovers (lawyers, accounting, etc.)
Hungry medical industry (i.e. device manufacturing) entrepreneurs.
Technical industry intellectual property control.
Etc. non-exclusive... when the market's getting crushed, there are killer deals everywhere!

I think this answer another 5-6 paragraphs of confusion further down in your post. There are never any "unfair exploits" in the stock markets (or any other exchange-traded markets.) Its insider knowledge, or advantaged access, that provides these lifetime deals. You can look for them... but often the best come begging when they know you are liquid in the down market times.

For people who do the things that have their household earn $70,000 or more (the top 25% of U.S. income earners,) these kinds of opportunities arise *ALL*THE*TIME*! At least they regularly arise for a great deal of the friends & clients I know (from all around the country...) and I can't believe that *ALL* the people I run with are really that far out statistically from people elsewhere.

I get the feeling that youse guys keep shifting the length of the contemplated period. IULs are intended for long term, not short term. But you keep coming up with examples of short-term deficiencies of S&P vs. IUL.
Perhaps you are getting confused between principal & liquidity. An IUL works best when the principal is left alone for the long term... but that doesn't affect the access of liquidity via policy loan for any short-term reason. The costs of liquidity are less than the gains on the principal, so there is no negative repurcussions, within leverage limits.

How about you start in ’81 and need access in 83?
Start in 2000, and need access in 2003? 2009?

You're screwed. Either way.
You've dedicated the money to a long-term investment but you handled it as short-term. You put short-term money in short-term investments (read: T-Bills or CDs). You don't put short-term money in long-term investments.

Ahhh... so this *IS* where you are getting confused.

With an IUL you are NOT screwed for immediate liquidity in the drawdowns, because your principal has not dropped, and you have 90% leveragable access to it at a positive arbitrage (more average annual principal growth than annual interest cost on the loan.)

Its only with a functionally unleveragable naked securities position that you are screwed... your only access is to kill your goose.

Ahhhh, I've upgraded the spreadsheet again.
You're the man! I *WILL* get into it... but not likely until mid-next week at the earliest.

What I will be looking to see if I can do (or you can steal the idea away from me... please) is to assign a couple variables;

1.) A single lifetime catastropic expense equal to 50% of the account highwater value, which hits at the precise low of a 30-50% drawdown. The naked position sells to cover, with the effect on equity forward. The IUL borrows to cover, carrying the burden of the loan and interest going forward.

2.) An "opportunity exploit" for the IUL each 5 years, requiring 20% of the prior highwater accunt value, for an immediate 100% equity acquisition, and 5% yield on value going forward.

I'm ambivalent as to whether a person with the mentality for a naked S&P500 B&H would actually ever even think, or look for (or be found by) such opportunities... I suppose we could have 2 S&P account owners to test;

2a.) sells wherever the account value is at the 5 year marks to take the exploits, every 5 years... and we see how it works out.
2b.) ignores the exploits, and just stays the course.

I think these numbers (50% of highwater, at low, for catastrophic expense... and 20% of highwater *whenever* for exploits giving an equity doubling and only a 5% yield) are quite conservative. The anecdotal real world numbers I have seen are further to the extremes in both the downsides and upsides.

Cheers,
Dave Donhoff
Leverage Planner
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It's because if you get foreclosed on, the bank keeps all that extra principal you paid.

Not necessarily. If your home gets foreclosed and sells for more at auction than what is owed on the mortgage, you, the owner, are entitled to the difference. However there are a TON of fees that will be put on top of your mortgage balance.
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You're probably frustrated because the cherrypicking is failing you. You chose (or stumbled) on a starting date at the lowest point that could be found. Go back just 2 years to '73, and get forced to partially liquidate in '75, and you're singing an entirely different story.

Exactly. In my case, I bought an IUL because, from this point forward, I do NOT want to risk my principal. I want to participate in an upside--if there is one--and an IUL allows me to do that, while at the same time there's no risk of a downside.
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It *ONLY* limits your gain if you never use your principal (usually during the deep market sell-offs) to take advantage of high-reward-low-risk exploits. If you are happy ignoring the massive winners available to the cash-endowed during the down markets (and you don't have to go looking for them... when you have the cash in the down markets, the opportunities are looking for you,) then maybe the 50%-downside-for-13%-upside *IS* the best you can do.

What and where are these massive winners that are going to come looking for me?
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I detailed out a few examples above;
Desperado real estate deals.
Desperado business acquisition & control deals.
Professional partnership takeovers (lawyers, accounting, etc.)
Hungry medical industry (i.e. device manufacturing) entrepreneurs.
Technical industry intellectual property control.
Etc. non-exclusive... when the market's getting crushed, there are killer deals everywhere!


There are "deals" for wheeler-dealers, not the average person merely seeking to invest his money and hopefully watch it grow.
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Cath,

What and where are these massive winners that are going to come looking for me?
I know you're being facetious... lifetime exploit deals don't pre-announce (that's why they are lifetime deals!)

Tell me this; Are you financially flush, and liquid? If the answer is yes... and if you don't keep it a secret... you'll be the one telling us about the deals.

There are "deals" for wheeler-dealers, not the average person merely seeking to invest his money and hopefully watch it grow.
If someone wants passive growth, and can afford passive unprotected risk, then a naked B&H is probably just the ticket... its dirt cheap, and worth every penny!

Dave Donhoff
Leverage Planner
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Dave, I think readers would find it helpful if you footnote unusual terms in your responses. For example, you used the term risk of ruin[1] which is, as you said, an investment term. When you use these terms--even if you think everyone ought to know what you're talking about--you could footnote to Investopedia. Then people wouldn't accuse you of making up words and phrases. BTW, "non-lost" isn't a word.

I also think Rayvt is correct: If an "ordinary" young person is starting out on his retirement path and intends to not touch his retirement account until he retires, he would be better off investing in the naked[2] S&P500. The math doesn't lie. He will end up with more money at retirement provided that future performance is equal to or better than past performance of the S&P500 and provided that his market timing (when he starts and when he finishes) is halfway prescient.

If, however, the young person is characteristically a wheeler-dealer, he can utilize an IUL. If the market tanks, and high risk/high reward deals go looking for him, the wheeler-dealer can take advantage of them, thereby enhancing his yield.

However, "ordinary" people don't want to take advantage of high risk/high reward deals they know nothing about (your list) and as a result likely won't take advantage of high risk/high reward deals. They just want, without drama, to salt away enough money for retirement. The naked S&P500 is a no-brainer for them.

I belong in neither category. I'm not young and I'm not a wheeler-dealer. I merely wish to shield my assets from what I believe will be a future S&P500 meltdown. So I bought an IUL which offers me some upside (in case I'm wrong) and full protection of my nest egg (in case I'm right).

[1] Risk of ruin http://www.investopedia.com/terms/r/risk-of-ruin.asp
[2] Naked position http://www.investopedia.com/terms/n/nakedposition.asp
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Cath,

Somehow you missed a point I emphasized & reinforced several times;
The massive-gain opportunities are *LOW* risk, *HIGH* reward....

I know that this concept is hard to swallow at first... but risk and reward are *NOT* always directly at counterpoints. They diverge and align, creating mammoth opportunities... but usually only to the 1st responder, and they usually require very quick liquidity when the general markets happen to be down and everyone else is in distress.

Even if you are an "ordinary young person" (and I know many) getting started anytime over the last 13-15 years in a naked S&P position would be (and factually has been) extremely discouraging. IULs have outperformed during this time by leaps and bounds.

The so-called 'wallflowers' you seem to be describing as 'non wheeler-dealers' are even LESS likely to stomach 30-50% losses on an intermittent basis... and even further unlikely to sit still to simply "wait it out" despite the cash blood loss. Theyoverwhelmingly bail out to whatever else "feels safe" at that moment in time.

The naked S&P 500, with 50% drawdowns underneath a 10-13% potential upside is a trader's nightmare... but a casino's dream. The human tendency to respond to "sweepstakes attraction" means that (just as you have here) they look at what appears to be big juicy numbers, and ignore the underlying risks.

The risk of ruin at a Casino comes from the odds being stacked against the 'buy and hold' (or steady-eddie) gambler, multiplied by emotional weaknesses that the games are designed to exploit.

The risk of ruin in any naked buy & hold equities position comes *NOT* from trade odds stacked against the investor... but rather from external capital risks, and also emotional weaknesses that the markets naturally work against as well.

An IUL is just an off-the-shelf product of a hedged strategy. Its the strategy itself that is the foundation of an overall winner approach, for all the reasons I have explained. You don't need the insurance industry to do it... its just easier to buy retail than build yourself.

Dave Donhoff
Leverage Planner
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Dave, I think readers would find it helpful if you footnote unusual terms in your responses. For example, you used the term risk of ruin[1] which is, as you said, an investment term. When you use these terms--even if you think everyone ought to know what you're talking about--you could footnote to Investopedia. Then people wouldn't accuse you of making up words and phrases. BTW, "non-lost" isn't a word.

The problem is that as I write, I’m basically some kind of autistic… I sincerely don’t know what terms other people are not actually smart enough not to understand. I do *NOT* consider myself all that intellectually gifted (though I always appreciate the kind compliments you & others give me… in my heart I don’t buy it…) so I internally assume that whatever I write… 99% of the readers are likely above ME.

If I have to manually handicap that, I’ll end up getting bogged down footnoting the definition of ‘is’….

No… if I am going to write anything, it has to simply be from natural flow.

I don’t do mammoth research & preparation productions…. Footnoting? not unless I have an external editor reading & screening everything I write (which *WILL* happen for a book…. Not for TMF conversations.)

Thanks for caring!
Dave
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Therefore you must always do your own due diligence. Doubly so if discussion becomes sales talk.

On the flip side, being in sales (we're all sales) the clients I value the most are the ones who do their due diligence. They come engaged, they ask good questions, I enjoy the client meetings, I feel like I do my best work for them. The guys who say "just handle it!" are the ones I worry about.


Preaching to the choir on that one. That is the exact advice I gave on this board recently re pricing your home...don't simply surrender the responsibility to the agent, or allow them to "buy" your listing by suggesting a too high listing price.

Anecdotes will always come up with person A was BAD, person B GREAT. I am glad to see you take an individual approach and don't simply accuse the sales force in general. Heck, I could give you nightmare anecdotes about clients, starting with the one who I had to insist read the contract, pointing out the line above where her signature went stating that she had read and understood the contract. It was amazing to me the responsibility for their lives that they wanted to put on my shoulders. Hey, I have kids already, not looking for more, but half the time that was what I was getting. I guess that's one way to interpret the client for life mantra, but not for me.

Many people are way too trusting, and that results in making poor uniformed judgements. If they were more informed, they would see past the smoke and mirrors of a salesman out just for themselves and find the solid ones wanting to do a good job.

IP
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No… if I am going to write anything, it has to simply be from natural flow.

And honestly, that's why I have a tendency to avoid your "long scrolly posts." They are too hard to understand. It's rather similar talking with you about the services you offer, which we did a year or so ago. If I can't understand something, I'm not signing on the dotted line. You might very well be brilliant at what you do, but few will ever get to know that unless you simplify your communication style, provide what your potential client needs, not what you need.

IP
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I also think Rayvt is correct: If an "ordinary" young person is starting out on his retirement path and intends to not touch his retirement account until he retires, he would be better off investing in the naked[2] S&P500. The math doesn't lie. He will end up with more money at retirement provided that future performance is equal to or better than past performance of the S&P500 and provided that his market timing (when he starts and when he finishes) is halfway prescient.

If, however, the young person is characteristically a wheeler-dealer, he can utilize an IUL. If the market tanks, and high risk/high reward deals go looking for him, the wheeler-dealer can take advantage of them, thereby enhancing his yield.

However, "ordinary" people don't want to take advantage of high risk/high reward deals they know nothing about (your list) and as a result likely won't take advantage of high risk/high reward deals. They just want, without drama, to salt away enough money for retirement. The naked S&P500 is a no-brainer for them.


Hell just froze over because I agree with you. I don't have problems with IULs. I have problems with salesmen selling them to the average family. I believe these insurance products are for higher income people who have excess cash flow after they've met their ongoing funding of their retirement accounts. I'm like 2gifts in that I segregate my funds into different pots. I'm not going to raid my retirement account for the deal of a lifetime condo unit. The average family doesn't have much discretionary funds at the end of the day to fund an IUL properly. For an IUL to work, you need to fund it over what the insurance costs - to build up the principal or cash portion of the policy. The average family should be sure to properly insure themselves first - life insurance and disability insurance first before worrying about homerun wheeler dealer invest opportunities through loans on an IUL policy.

PSU
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And honestly, that's why I have a tendency to avoid your "long scrolly posts." They are too hard to understand.

I've said it in the past - he writes like a late-night infomercial.
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It's because if you get foreclosed on, the bank keeps all that extra principal you paid.

Not necessarily. If your home gets foreclosed and sells for more at auction than what is owed on the mortgage, you, the owner, are entitled to the difference. However there are a TON of fees that will be put on top of your mortgage balance


Only idiots (or those who are no longer mentally capable of handling their finances) allow foreclosure when their mortgage is not upside down.

If a property auctions for more than the mortgage balance and foreclosure fees, there is no reason that it would not have been possible to sell the property.
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Somehow you missed a point I emphasized & reinforced several times;
The massive-gain opportunities are *LOW* risk, *HIGH* reward....


OK, make it low risk/high reward. Same thing...most people don't want to suddenly go out and buy an apartment building to make up for their decimated S&P500. They're just engineers and secretaries and physicians, not real estate moguls, no matter how MASSIVE the gain is.
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Tell me this; Are you financially flush, and liquid? If the answer is yes... and if you don't keep it a secret... you'll be the one telling us about the deals.

We know you have a ton of contacts through your leverage planning business and mortgage business. For the average person who doesn't regularly have this extensive network of contacts, how are you supposed to advertise your are financially flush. Put an ad in the newspaper? Write it in CAPITAL LETTERS on Facebook and LinkedIn. Personally, I'm a private person so I don't go around blabbing about size of my investment accounts. Thinking everyone has a network like you do is similar to someone thinking everyone lives in big fancy houses because all their friends do too. Sometimes it helps to drive out into the world and see how the low to median income people live. It gives you some perspective.

PSU
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They're just engineers and secretaries and physicians, not real estate moguls, no matter how MASSIVE the gain is

I know of quite a few engineers who own rentals. The "apartment building" may only be duplex or their previous home.
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1.) A single lifetime catastropic expense equal to 50% of the account highwater value, which hits at the precise low of a 30-50% drawdown. The naked position sells to cover, with the effect on equity forward. The IUL borrows to cover, carrying the burden of the loan and interest going forward.

Talk about 'cherrypicking' - no fair choosing a particular loss point, since the catastrophic expense could happen at any time. You need to show what happens for different timings of this catastrophic expense, not a single point, and provide the results of the various timings.

And which account's 'highwater value' are you choosing? It needs to be the same amount for both accounts - the non-FDA approved surgery isn't going to cost any more or less just because you have a different type of investment account. So, if the highwater mark of the IUL account is X, and the highwater mark of the S&P is 2X, you should pull 0.5X from each account, not 0.5X from the IUL and X from the S&P.

And since you are going to show varying timings, maybe you would want to base the amount that has to be pulled out on the high value of an account up to that point, rather than the entire lifetime. After all, a year or 2 in, neither account is going to be able to pull 50% of the lifetime highwater mark - but, the non-FDA approved surgery requirement just as easily may happen at that time as later on.

2.) An "opportunity exploit" for the IUL each 5 years, requiring 20% of the prior highwater accunt value, for an immediate 100% equity acquisition, and 5% yield on value going forward.

Well, since these are 'wheeler-dealer' type opportunities and 'wheeler-dealers' would be fine borrowing on margin. So, you need to see how the S&P strategy would work using a margin interest cost, at say, prime + 1 for the same scenarios.

AJ
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