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Why EIUL’s might outperform mutual funds! October 11, 2008

Posted by shaferfinancial in Uncategorized.
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Several months ago I posted on equity indexed universal life insurance products (EIUL) versus mutual funds on this and at Bawld Guy’s real estate investment blog. There are always critics of this product that want to compare fees between the products.  No doubt, EIULs have fees, many times more fees than low expense mutual funds like Vanguard.  But, these folks miss the point.  It is all about the strategies employed.  Now, is a good time to talk how the basic strategy makes a difference.  EIULs have guaranteed rate of return, usually 2%.  They also have ceilings, like my favorite EIUL has a 30%/ two year ceiling.  But more importantly, they never go negative.  In other words any year the underlying index is negative, your EIULs cash value remains the same.  Let’s look how this factor can benefit you in down years like this year.

If you had $300,000 in a mutual fund at the peak of the market in April, and it got the S & P 500 market return (remember this is impossible since even Vanguard mutual funds have expenses and fees) it would be worth somewhere around $168,000 today.  If you had cash value of of $285,000 (lets pretend the extra fees and the cost of insurance cost you $15,000) in a EIUL, it would be worth $285,000 today.  You would need a 79% rate of return to get back to your $300,000 in your mutual fund.  You need to get a 70% rate of return to catch up with the EIUL!  That’s right, a EIUL never gives a negative return.  Looking at the historic rates of return, I doubt you will ever catch up with a EIUL, fees and all!  Remember, we have a bear market, on average every 6 1/3 years that averages a 31% decline.  We average 2-4 down years every decade! My EIUL has a two year 30% ceiling, so you would need to outperform that by more than 70% and still overcome other future down years!

Wall Street has been very astute at reacting to every challenge to its mutual fund industry.  It has adeptly allowed people to focus attention on fees instead of the actual results of mutual funds.  Now, as people panic and pull their money out, it has a built in blame factor to further hide the failure of the mutual fund strategy from folks.  Already, they have cranked up the propaganda machine blaming individuals for the poor performance of their retirement vehicles!

Those of us who have EIULs are not afraid to look at our statements as they come in the mail, can you say the same!

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Comments»

1. BawldGuy - October 12, 2008

If there’s ever been an object lesson, this past week has been it — and a half. I’ll be publishing a post on Bloodhound soon, revisiting some pretty hot debate generated several months ago when I’d posted on the very topic.

The vitriolic comments of some have come home to roost in some of their employees’ severely reduced net worths.

Human nature being what it is, one wonders if even now they’ll come to the party?

Timely info David. For those who listened to us long ago, it’s already proven golden.

2. Another Investor - October 14, 2008

David:

Kindly explain the commission rates and fee structures for these investment vehicles to your audience. Please use a typical example of a product you sell. The potential buyers of these products deserve full disclosure.

From what I can see, the biggest beneficiaries are the insurance companies and the people that sell these policies. Personally, I would rather take market risk, not pay the commissions and fees, and not limit the upside potential.

I don’t know anyone who recommends investing all of one’s funds into one S&P 500 based mutual fund. However, to be fair in your comparison, I think you should compare the performance of the S&P 500 over a reasonable retirement asset accumulation period (25 to 30 years) with your EIUL, after accounting for all fees and commissions. If you can show the EIUL product beats the mutual fund, then you might have something worth buying.

3. shaferfinancial - October 14, 2008

Another Investor,

I always tell the truth about the fees included in EIULs. If you read the post completely I talked about them in the post. My clients are given illustrations that include a complete disclosure of fees, unlike clients of mutual funds. If you read some of my other posts on the subject I use real numbers from real policies, again, unlike mutual fund salesmen (like you???) I even illustrate my policies with a rate of return that is 1-2% less than what the historical evidence demonstrates these policies obtain. Further, I tell people that EIULs, like mutual funds, will not make them wealthy (again unlike mutual find salesmen), using actual data to back up my claim. You are putting up a straw man; unable to back your claims with any data.

I want you to explain to my audience what the EVIDENCE demonstrates is the average rate of return for individuals invested in mutual funds. Don’t even try to use some theoretical number that isn’t backed up with hard data for actual investors.

And finally, I have done exactly as you asked, except I included taxes paid, in other posts and demonstrated EIUL beats mutual funds in most (read not all) cases.

I have had discussions with folks just like you for years on this subject, so it gets tiring dealing with disingenous folks who think because someone makes a good commission on a product it is necessarily a bad product. Stick with mutual funds if you like, but don’t bother trying to tell anybody that can think it is the way to wealth, because it isn’t.

Next time, instead of insulting me, and insinuating that the commission earned is why I say what I do, try to make a cogent argument based on real evidence (it is out there).

By the way readers, notice how he wants me to compare the S&P 500 Index versus EIULs (accounting for all fees and commissions). Can you invest in the S & P 500 Index with no fees? All at the same time now…..NO.

4. Another Investor - October 14, 2008

David:

I’m not trying to insult you. I’m trying to get you to prove your point.

I’m not a mutual fund salesperson. I’m a real estate investor. Like you, I also invest in individual stocks. I like your choices in that area. I also believe that when you find good ones, you will do well if you stick with them. After all, you are buying a piece of a business, and astute business people will make money for you as well as for themselves.

I also agree the majority of mutual funds aren’t worth the management fees charged and commissioned and fee-only advisors don’t often sell you the best funds. However, I own mutual funds, ones whose past performance, management and fee structure I am comfortable with.

As I understand the EIUL’s, they are also invested in mutual funds. These funds are run by or selected by the insurance company. My experience with insurance companies and mutual funds is through a deferred compensation plan. I find they run lousy funds and they contract with fund companies that don’t offer great returns. I can easily outperform their choices with just a few minutes of research.

I know no one who is truly wealthy who has purchased an EIUL. Most wealthy people I know are invested in their businesses and in real estate. Some own paper assets in retirement accounts. I know a few high earners who have been sold EIUL policies, and they don’t really understand what they own.

If these products are really successful, then show your audience a side-by-side comparison of an investment made over 25 or 30 years in an EIUL policy that invested in funds mirroring the S&P and the same investment in a Vanguard fund holding the same or very similar equities. Or pick a diversified portfolio of funds for both investments if you think that is more representative. Include all fees and commissions for both investments. If you can show the EIUL is the superior choice, you will convert the unbelievers and sell a lot of policies.

Until I see the advantage, I will continue to bet WITH business owners and not AGAINST an insurance company.

5. shaferfinancial - October 15, 2008

Here is how you started out your comment to me:

“Kindly explain the commission rates and fee structures for these investment vehicles to your audience. Please use a typical example of a product you sell. The potential buyers of these products deserve full disclosure.

From what I can see, the biggest beneficiaries are the insurance companies and the people that sell these policies. Personally, I would rather take market risk, not pay the commissions and fees, and not limit the upside potential.”

So if you wanted to challenge me on my ideas about EIULs you would be better off not challenging my ethics. Not a word about the math, the returns, or anything else on your comment. But look at the title again. It does not state that EIULs will outperform mutual funds, but says they might. Once again, I am comparing two strategies that I consider asset protection strategies, not wealth creation strategies. But I will take you at your word and let this go.

I have several posts on EIULs on this and other blogs that explain how they work using real numbers (four links to the right under life insurance). You are mistaken on what they invest in and how they work. I think you are mixing equity indexed universal life with variable universal life. In variable universal life you can choose mutual funds as your investment vehicle. These policies also have higher fees than equity indexed universal life policies, which are considered fixed rate investments, not equity based investments. In short EIULs invest in fixed rate securities in order to make the minimal guarantees (usually 2%). The rest of the premium is invested in options on an equity index. These options are sold with a ceiling, usually 12-15%. If the index goes up you get the amount that it goes up to the ceiling. If the index goes down you get nothing. Now here is the key component. Each year (or leg) your cash value either goes up the amount of the index gain (to the ceiling) or it gets no gain. It never goes negative. That ability is what makes it a superior hedge against inflation compared to mutual funds. And you add in the tax benefits (basically if structured correctly you never have to pay taxes on the cash value).

I don’t have to figure out the returns because the insurance company has done that using historic data going back to 1950. Using that data this strategy would give you a 8.3% rate of return on the 1 year S & P Index and a 9% rate of return on the two year option. (Although, I did look at the actual numbers for myself, but only went back to 1975 or thirty years, and came out with a similiar return.

Prove my numbers? Well, the proof is that every research data points out that investors in mutual funds get 7-10% less than the market. For the last twenty years mutual fund investors average 4.4% (DAlbar, Inc.). Investors in EIULs average over 3% higher than that (although EIULs are only about one decade old). But as you know you can never prove anything about the future performance of financial products. But one of the posts linked under life insurance does exactly that, using real numbers, including fees and sales charges from the insurance product, and a low .5% expense for mutual funds (average mutual funds fees and expenses are 2.5%!). Feel free to comment on those numbers.

As to who owns life insurance products, lots of people. But probably most prevalent are highly paid employees. CEOs and CFOs and upper level management own a ton of life insurance. Banks and corporations own a ton of life insurance. And despite your misinformation business owners own alot of permanent life insurance policies to protect their partners (key man policies) and to arrange to have their businesses bought out from their families if they die. If they don’t die they have a large reserve of available cash for retirement. I have commented on this too and there is a link to that post.

“I know no one who is truly wealthy who has purchased an EIUL. Most wealthy people I know are invested in their businesses and in real estate. Some own paper assets in retirement accounts. I know a few high earners who have been sold EIUL policies, and they don’t really understand what they own.”

Yes, you are correct about the wealth building tools the wealthy use ie: real estate and businesses. I have also commented at least a dozen times on this in my blog. I have stated that mutual funds and EIULs don’t do a good job of building wealth and stated why. I suggest using EIULs for some of your wealth to hedge against inflation and more importantly taxes. EIULs actually work great with real estate investing. The real estate investments create wealth and great tax reductions. Then as you see your real estate empire enlarge and your tax deductions go down over time, you move some of your wealth into an EIUL. Done right you are protected from the tax man and have a ready reservior of cash at your disposal. And if you have an untimely death, then your family has a big chunk of $$ to unwind your real estate investments at a reasonable time and pace.

I encourage you to look around my blog and click on the posts that have to do with EIULs to see my philosophy which from your comments, you really don’t understand.

I commend you on becoming an active investor in both real estate and stocks. That, along with entrepenuership is the basis for my philosophy at the Shafer Wealth Academy. But even successful investors can occasionally learn something. You will find I am more inclined to discuss things when someone doesn’t insult my ethics from the first sentence! A final question, what does it matter about fees and sales commissions if you get a product that takes care of a problem efficiently? I wish you continued success in investing.

6. Elias - November 8, 2008

As an insurance agent it might be said that I possess an inherent bias. That aside most folks who look at an EIUL miss the most important point. OVERFUNDING!

This is what sets an EIUL apart from all other insurance products. Once Insurance fees are met all excess goes into the investment bucket. There the rates are known and can be calculated over time.

Can they be changed? Certainly but they are guaranteed to never go negative for the life of the Policy. Any good agent can produce the charts to show how the policy will perform over time.

The index to which it is pegged will have some influence over it but so to will any other fund be influenced by the market. It is my belief that there is no other financial vehicle out there that is better suited for the accumulation of wealth than a well funded EIUL.

7. shaferfinancial - November 8, 2008

Elias, this is where you and I disagree. A EIUL is not a great vehicle for the ACCUMULATION of wealth. The rate of return you will get inside an EIUL is nowhere near what you need to get to accumulate wealth. What it is, is a great financial vehicle for the preservation of wealth. Protection from inflation and the tax man makes this product a perfect place to put accumulated wealth.

I doubt if there has been anyone that has accumulated real wealth by using a EIUL (or a mutual fund in my opinion). But if you have a wealth creation device like real estate, a business, or other investments, then overfund an EIUL with the accumulated wealth!

Regular readers of my blog understand my thoughts on this. Thanks for posting, and hopefully you will stick around.

8. Brett Anderson - November 30, 2008

David,

An associate of mine referred me to your site because I have written a book called “Last Chance Retirement”, that is about everything there is to know about Indexed Life. What it is, how it works, and how to design a policy for maximum accumulation and Tax Free Income. I wrote it originally for the layperson so that they could feel like they got the real scoop – the one other thing that makes my book different from any other is that I examine and compare ALL the IUL’s in the market: I show you the Cash Value gains, the possible income and the ROI from 5 years to 60.

Having been an agent for 28 years the first people to read it were other agents, and it has spread across the country in just a few months. Most consider it to be the ‘bible’ on Index Life, and one very large agency tells their advisors that if they haven’t read it, “you don’t belong in the business”. The other typical response from most agents is they didn’t realize how much they didn’t know about IUL until they read my book.

Some agents don’t like it because I talk about commissions and how that can affect the long term return of the policy, and so how to design a policy best for you – not the agent. Most agent’s though use this aspect to their benefit – one advisor closed 3 cases in one week for $50,000 in Target because his clients felt assured they were getting the best policy in the market designed the best possible way for them — otherwise in most circumstances the result is usually zero sales.

To answer one of your respondent’s question, I was able to have one company run a hypothetical return for me for the previous 20 years, based on the actual returns of the market and including expenses during the years of no gains – this included the only period we’ve had of zero gains three years in a row. This kind of illustration cannot be run by law for a client illustration because the gains in some years are more than the look back average they are approved to use. The return of the “market” over that period less 1.5% for all fees = 7.25%. The NET ROI for the IUL policy = 7.86%. The result was also actually MORE than can be run with a client illustration.

If you follow the 4% model for income, with a 33% MTR the after-tax income for the stock plan (above) = $23,000 year. The Tax Free income from the IUL = $70,000 year.

There is no other “investment” that is approved by Congress that allows you to participate in stock gains on a tax deferred basis AND with a principal guaranty AND allows you to access the gains Tax Free AND allows you to bequeath the remainder Tax Free. And with many, many other benefits there is not the space go into here.

The book is almost 400 pages so I cannot do justice to the concept and all there is to know about it in just a couple of paragraphs. But if you and your readers truly want to know more about this, then please visit my website: http://www.lastchanceretirement.biz , where you can also read the many testimonials from people all across the country.

Thank you,

Brett Anderson

9. Joshua - December 1, 2008

When did this become an advertising ground for peoples stuff? I hope David isn’t going to have to start moderating posts.

BTW, I’m thinking about writing a book entitled, “How to market your product by using below the belt and annoying methods”. On sale now for today only.. cost is one arm and one leg. Other appendages not accepted at this time.

10. sujay - November 16, 2014

Can u please write an article comparing dividend paying overfunded whole life insurance vs EIUL.
LOVE YOUR BLOG

shaferfinancial - November 18, 2014

Sujay, thanks for kind words. Hard to compare the two because they are structured so differently. Would have to make many different assumptions.
There is no comparison to the amount of cash value build up or income you could take out between the two. More than twice as much for the EIUL. And as I have said, they are structured to accomplish two different items. Whole Life structured for guaranteed death benefit. EIUL for maximum cash value build up and loans out of the policy. Have to decide which is more important to you?


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