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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!