No. of Recommendations: 5
Thanks for the responses so far.. interesting reading the different opinions. I'd say I'm reading better arguments from the pro than the con side at the moment. Has anyone heard of these things going sour? The people that are against this aren't really making specific arguments why this is bad, more just overall statements like; if they are getting commission they are screwing you and if the contract is really long it must be a scam. I am actually hearing more logical arguments why this may not be all that bad of a way to go.

Appreciate the feedback, still curious to see some further good points from the people against this plan AND alternatives to it.


We had a long thread or two on these, might be worth seeing if the dysfunctional search function yields anything.

However, I'll drop my pocket lint since we're on the topic. I'm not that old yet [kaff,wheeze], but I'm old enough to remember when regular UL's were very popular and commonly sold as retirement vehicles. The reason why they were popular is that back when interest rates were high, a salesman could show you a chart demonstrating stunning past returns and it was easy to see that by retirement age your main problem would be deciding which Hawaiian Island you wanted to buy.

Of course what really happened is that as interest rates dropped, many policies were underfunded and went bust, and to add insult to injury that's a taxable event. So all the advantages the salesman said were going to be there, really weren't. There might be a lesson in there somewhere.

Since you are talking about retirement investing, presumably you are looking at long-ish time horizons. Just for discussion let's say 20 years. It would be a worthwhile exercise to spend a few minutes in Excel and look at all the 20 year rolling periods starting in 1928 to the present day and see if this thing makes any sense. It would take a bit of doing, but you could knock it out in an evening. If in fact it comes out money ahead most periods then it might be something to start thinking about.

However, that's only a starting place, that backtest still won't tell all you need to know. You need to know how this thing would have actually performed over time. If you look at the fine print, you'll find the insurance company can drop the upper cap down to as low as 3%. I guarantee that you won't beat the market over any non-trivial period of time with a 3% cap. The only way to do it is to go back and calculate the implied-volatility, input into Black-Scholes or whatever pricing model you are using, and then calculate the actual cap, THEN do the backtest. That would tell you if these things are likely to outperform over any long period of time. That would be one whole helluva lot of work. My Excel fu is strong, but it isn't that strong.

Two final words about risk. AFAIK, these thing have only been around ~10-15 years-ish. As with the UL policies, just because the salesman can show you a chart how they outperformed during some recent period it does not follow that out performance will continue into the future. If you are content making investments based on the past ten years, buy gold. Gold blew the doors off IULs. To put it another way, if you are making long term investing decisions based on only ten-ish years of data, you are taking on risk, not avoiding it.

The final word is that over long periods of time--like 20 years, the market risk is actually very low. You can reduce that risk even more by simply adding cash to your portfolio. The ability to avoid downside risk is valuable in the short term, not in the long term.
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