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Why EIUL? July 19, 2010

Posted by shaferfinancial in Finance.
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As most of my readers know, I am a big believer in equity indexed universal life insurance as well as a seller of it.  I have my own EIUL [AVIVA] as well.  Over the last 6 years of ownership it has performed exactly as it was advertised too.  Over the last few years, since I decided to sell the product, I have learned quite a bit about the product.  Here are some key points for anyone interested in the product:

1. It is permanent insurance, therefore has all the good and bad of an insurance product.  Primarily the bad part is the front loaded expenses [over the first 10 years].  So this product is not one to be entered into on a whim.  This is a decision you make and live with.  Now the good part.  If you have dependents or heirs then the insurance aspect is a great bonus to most retirement plans.  How many 401Ks/IRAs do you know of that will pass on 5 to 10 times the invested value to your spouse?  But most of all that is why you really don’t need to worry about the front loaded expenses.  If you die prematurely, no one will worry that you paid a lot of expenses in the first 10 years will they?  In the long run the expenses will cost you between .5% and 1.5%.  This is actually below the average expenses from the mutual fund industry.

2.  When structured correctly, there will be no income tax owed on money to retrieve from the policy.  Perhaps the biggest attraction for folks is this characteristic.  What will be the income tax [both state and federal] when you need the money? Since no one can predict it, this takes a big uncertainty away.

3.  The cash value [excess premium] in your policy is not invested in the stock market, but can get similar returns.  This is perhaps the biggest misunderstanding out there about EIULs.  The strategy is not even close to investing in mutual funds. First, if the market index goes down, your cash value doesn’t.  No negative returns means less variability which is the retirement income killer.  Yes, you are capped in your ability to capture positive movements [currently 15% for the Minnesota Life product], but when you run the numbers your overall return is higher using this strategy than simply mirroring the stock index.

4. Because the cash value doesn’t go below 0, there is less panic in the product, therefore less temptation to change.  When we look at actual behavior, people are their own worst enemies.  The actual returns gotten by real live people in mutual funds is 5-7% less than what the actual market gives.

5.  This product is not for everyone.  If taxes are not of concern for you then this product probably is not for you.  If you are a “do-it-yourself” investor that loathes expenses and feels they can ride the ups and downs of the market [many people think they can, but data tells us that their actual behavior is something different] then this product is not for you.

6. This should not be your one and only savings/investment vehicle.  I have posted many times on my three legged approach; EIUL, individual equities, real estate.  Point being this should be your conservative part of your portfolio, with internal returns expected around 8%.

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Comments»

1. Steve - August 9, 2010

Dave, you mention in your post that the product has worked as advertised. In the past several years we have seen some large swings
in the value of various stock indices. How do you think this product will perform if we have a 3-5 year period where these stock indices basically stay where they are now or perhaps move up just 10% over the
next 5 years?

shaferfinancial - August 20, 2010

Each year the Minnesota Life product will go up somewhere between 0 and 15%. Since it doesn’t go down, profits are locked in. This is a favorable place to be in a uncertain market. When the market went down 60% I stayed the same. When the market went up 40% I got my interest credit. Fact is, if you have been in the market the last 10 years you are probably in negative territory. My EIUL is not. That is what I meant when I said performing as expected.

2. Quincy - July 19, 2013

Hi…. example 50K iniital deposit @ 5 years… Then The Index market is down 5 straight years… isnt the DB ins. and fees paid out of the policies cash vale ? Therefore reducing the policies cash value in a down Index year of 0 credit over those 5 years ? Thanks

shaferfinancial - July 23, 2013

Yes. But if you are thinking about this product for the short term you shouldn’t be in it. By the way the longest series of down years in the S&P 500 is 3 years [2000-2002] Other than that the losing years have been limited to 1 year.

Qincy - July 23, 2013

Thanks !!!…. No ..I’m 57 and its for the rest of my life , how ever long that is!! Also…… dont the Ins. DB premiums go up every year for the rest of your life? If so, WOW !! If I make it to 87 the Ins. cost will be huge wont it ?? Thanks again !!

shaferfinancial - July 23, 2013

When structured correctly the overall expenses will be less than 2%. Permanent life insurance takes the increased cost of insuring at older ages into account and was designed to deal with it. You really have to see an illustration to see how it works.


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