No. of Recommendations: 5
I have no dog in this fight, but I must say that those who are arguing against Dave and IULs do not have a good grasp of how they function.

My understanding of the product is as follows:

1. Your princial is guaranteed and the company uses it to invest in high quality/safe bonds.
2. The interest generated by those bonds is used to purchase an "at the money" call option on your chosen index (often the S&P) while simultaneously selling a call option with the same maturity on the same index. This "short" call represents the "cap" on your potential gains and its strike price is typically about 15% higher than the long call.
3. At the end of the year, your long call option will mirror the percent gain in the underlying index and your account will be credited that amount up to the cap - any gains above the cap will be offset by a corresponding loss in the short call position.
4. If the index return for the year is negative, both call options expire worthless and you are left with your original prinicpal.
5. This process will repeat itself year after year - capturing the gains of an underlying index up to a certain cap, but never losing any of your principal. Now what may change is a) amount of interest income that can be safely generated by the company from your principal amount to purchase the options and b)the cost of the options based on market volatility.

So..the company is not pocketing the dividends for themselves. No one in the above strategy actually owns the underlying equities and is therefore not entitled to the dividends.

If you are going to point out that the "cap" on gains is a negative because the S&P often rises more than 15%, you must also point out that the "floor" (no loss of principal) is a positive - as I believe the S&P returns are negative about 1/3 of the time.

With these products you certainly run the risk of the cap being reduced. The cap will be determined by the cost of the underlying options. And those options must be purchased from the interest generated by company's portfolio of bonds. Current interest rates on government and AAA corporate bonds are at historical lows - however, they could still go lower. I have no idea whether the current option prices are historically high, low, or average.

Given the fees, cost of insurance, and predicted returns, I leave it to each individual to determine whether IULs make sense as an investment vehicle. But before criticising a financial product, I believe you should understand how it functions.

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