Insurance Investing and the $100,000.00 Challenge - The Outcome

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  1

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  The outcome is now posted:
  
  http://moneywatch.bnet.com/investing/blog/irrational-investor/insurance-investing-and-the-10000000-challenge-the-outcome/654/
  

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  2

  Wealth Builder

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Mr. Roth,
  
  Thank you for the update. You've provided a GREAT public service for the investing public.

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  3

  r_buckner

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Mr. Roth,
  Thank you for all of the work that you have put into this subject. I recently attended a "seminar" that touted this strategy, as a way to achieve "safety, liquidity and rate of return", along with tax-free "withdrawals". And, it recommeded that it was unwise to leave your untapped equity in your home and wise to take it out and put it into an IUL. This strategy certainly makes the insurance agent and the mortgage broker richer!
  I figured that the devil was in the details, but had not seen an actual policy illustration, so thanks again for crunching the numbers and facts. The promotion and marketing of these policies and strategies are totally misleading, and downright financially dangerous.

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  4

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  WealthBuilder and R_buckner,
  
  I appreciate your comments. I'm curious why I haven't heard from Mr. Anderson or other insurance producers.

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  5

  Brett A

  10/12/09 | Report as spam

  Challenger Response

  The reason why is because you had a week to think about and write your reply and refused to send me a copy in advance, so when I complete addressing each of your lies, ommissions and distorted statements it will be posted. In the meantime I'm sure the other advisors are allowing me the courtesy of waiting until I've had the time to do so.
  
  Brett Anderson

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  6

  Invesave

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Just like r_buckner, a few friends and I also went to a seminar recently and heard about the same types of sales pitch from a team of investment advisors. All of us are over 65 and relatively conservative with our money. I think the recent bear market has provided fuels to a lot of snake oil salesmen. None of us were tricked into buying the snake oil, but we were all amazed at how smooth and articulate the sales team was.
  
  Allan, please keep fighting for us, the vulnerable small investors.

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  7

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Thanks Brett.
  
  Don't you think I'd like to put my family's nest egg in a product that would give me a "NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk?"
  
  I always want to lose these challenges.
  
  Allan
  
  

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  8

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Thanks Invesave
  
  No matter what the market does, the financial industry will always think of new ways to seperate us from our money.

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  9

  Brett A

  10/12/09 | Report as spam

  Challenger Reply

  Hey, I hope nobody is surprised at this decision! I knew this is what his answer would be when I first took on his Challenge. But hopefully in the end a lot more of you are now educated about the fact that there is a place where you can save your money without downside market risk. What Allan Roth says today is one of the biggest collections of lies by omission, distortion and taking things out of context that I have ever read. But I knew he had to do this - that is why when he said I had no credibility because I could not instantly provide him the source for a fact about long term care - that I said I would not when he again demanded that I do so, because I did not want to deprive him of an excuse for weaseling out on his Challenge.
  
  What was his actual Challenge? ?I would love to put my own nest egg in a vehicle that gives market returns with limited downside risk. For many years, I have been challenging producers to show me a product that can do just that. If successful, I promise to buy the product.?
  
  I replied: ?How about a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk.?
  
  His response: ?If you show me how to get an 8% annual return, I buy it from you and write about how you won the challenge.?
  
  I said sure, then he called me and said it had to make this return by year 10. I said it can do that, but to do so the gains will be taxable. I sent him the information that showed Indexed Life would do this (more later).
  
  So he called me up again to say it had to have a guaranteed return of 8% in year 10. There is nothing that will do that, but this shows how he kept changing the challenge as I kept meeting his new requirements, until finally there is nothing that exists that can possibly do so.
  
  So what is Indexed Life and how does it work? It is a way that credits only the (annual) gains earned by an index to the cash value of a life insurance policy. You are guaranteed the minimum you can earn is 0%, which is a way of saying your account cannot go down in value when the index/market does. Your principal and gains are guaranteed they cannot do down in value because of what the market does. But there are still policy expenses, just as there are with any investment.
  
  There are several ways to design a policy. The first step is to determine if you want to be able to access the gains Tax Free. If you do, then (short answer) Congress revised the law so that premiums for most have to be paid in over 4-5 of the first 7 years. The next step is to design a policy with Increasing vs. Level insurance. This way you reduce the insurance amount and so costs to the minimum allowed by law. When you combine these steps, I told Roth that we would put in $20,000 each yr for 5 years. Doing this the net IRR would be 5.53% yr 10; 7.44% yr 20 and 8.01% year 30. (Dalbar in their 2009 study determined that the actual net IRR for the typical mutual fund investor the past 20 years, is 1.87%). This is for current policy crediting parameters which are less than the long term average. If he wanted to put the $100,000 in all at once, he could, but the policy becomes a Modified Endowment Contract (or MEC). By doing this the IRR of year 10 is 7.49% NET all fees; in year 15 it is 7.98%. Again both of these are using current rates.
  
  At this link you can see the IUL proposal Roth has, including all the annual policy expenses and IRR pages:
  http://www.keepandshare.com/doc/view.php?id=1452589&da=y . At this link is the illustration of the 5 pay, tax free income method. http://www.keepandshare.com/doc/view.php?id=1452673&da=y . You can see $20,000 per year Tax Free coming out starting yr 14. On page 18 you can see the IRR of the plan using (only) current crediting (low) rates and only the S&P Index. You will note that based on long term historical averages the account ONLY goes UP in value. There are 2 different ways to borrow gains from a policy -- Roth and I did not discuss this because he never expressed an interest to do so. The IRR is NET all the loans and fees.
  
  I asked Roth several times if he preferred the plan with the better long term return with Tax Free gains, or the method with the higher 10 year IRR. He would never reply except by telling me to decide. I can?t decide what is personally best for him without personal information on his long term needs, but the Challenge he kept revising was for a 10 year IRR of 8%, which the MEC can very likely do.
  
  First, how does the Indexed Policy work? With Minnesota Life it currently offers the highest crediting cap in the industry - there are 3 index options and you can mix and match them however you want each year:
  1) S&P Index: 16% Cap and 100% Participation Rate
  2) S&P Index: 14% Cap and 140% Participation Rate (so if the index only earn 7% your account is credited with 9.8%).
  3) Dow Global (exUS): 16% cap and 100% Participation Rate.
  
  The Index option I discussed with Roth was always #2, but for some reason he later he insisted I was lying and sending him analysis for the 16% cap. In the end the long term difference in gains will likely be very small, but it shows what I had to contend with.
  
  He next makes an outright LIE when he says the policy illustration rate I?m using (9.21%) is the high value of a bull market. He should be ashamed of himself for making this lie, as I provided him with substantial analysis to prove just the opposite. First, I do no analyze the market based on only Dec. 31st values. Those do not reflect what the Index/Market does over the course of an entire year - and June can be very different from Dec. I use a program that computes the return of the index based on the quarterly-annual gains for the past 65 years. So I look at March 31-March 31, June 30-June 30, etc., then avg. the 4 values for an annual average.
  
  Next, I do not base my analysis on a single period of time. I look at the 5, 10, 20 and 30 year running gains for the past several decades to determine what a realistic average would be. For this Challenge all that mattered to Roth was the 10 year returns. For the IUL using current Caps for the #2 option the history is:
  
  Past 10 year periods:
  Past 5 / 8.79% (less fees)
  Past 10 / 9.27%
  Past 15 / 9.55%
  Past 20 / 9.56%
  Past 25 / 9.32%
  
  Running the illustration for him at 9.2% is actually conservative based on the past 35 years.
  
  This is what it was for the actual S&P Index:
  Past 5 / 6.54% (less fees + dividends)
  Past 10 / 8.29%
  Past 15 / 9.65%
  Past 20 / 10.29%
  Past 25 / 10.20%
  
  But what about these ACTUAL index rates? Should I base projections of the actual S&P 500 Index solely on the past 10 year return (1999-2008) of 0.84%? Of course not. The market has been experiencing historical lows; and interest rates are at historical lows too.
  
  How does IUL work? Instead of crediting you with your share of the interest it earns, it uses them instead to buy options on the index. If the index goes up you get all the gains the options could buy. If the market goes down all you lost was the forgone interest used to buy the options. If interest rates go up, the co. can buy more options; down it buys less. The caps are determined buy how many the co. could buy. A few months ago interest rates went down again, so the cap was lowered from 17% to 16%. The co. did not as Roth claims, make a penny from doing this - it did not provide the co. with any insurance perse at all. It is an outright LIE that I told him the company has never lowered its caps. If you want 100% of the index gain you can invest in the actual index -- but then you also get 100% of the losses!
  
  If I?m not going to use the current gains of the index as a ruler for long term projections of it, should I have to do so for the IUL? I say not. Interest rates will go back up, the co. will be able to buy more options for your participation in future gains. If I raise the cap just 1% to 15% the 10 year IRR will increase to 8.03%. Knowledgeable analysts I?ve spoken to expect a more realistic long term cap will be 16% -- this has an 8.81% NET IRR.
  
  None of these potential gains has factored into them the higher return of the past several years of the Global Index. If I make it just 1/3rd of the account mix, the possible 10 year IRR goes to 9.32%. If we assume it can increase the overall gain by 1% point, the potential gain is 9.83%. So there is plenty of leeway based on historical long term gains of the indexes, to potentially net 8% with the IUL! This MORE than meets the original, initial challenge of a way to earn market returns (with 8% net) with limited downside risk.
  
  What about the insurance need requirement? For starters, there was NO such need requirement for the Challenge - which only required a way to earn market returns with limited risk. So to say that this was not met is just another of several excuses Roth is using to weasel out of this challenge. But I expected no less. But what about a valid insurance need? There are very, very few of us who do not have an insurance need either for children, spouse, parents - or most certainly for ourselves! This is what the actuary at Minnesota Life said to him that was also twisted, distorted and taken out of context by Roth to serve his own purposes and the answer he wanted / had to give you so as not to have to fork over $100,000 for this challenge.
  
  I could write many pages on this need (I did with my book Last Chance Retirement), and I guess Roth refused to read the article I posted last week to the 401k article in TIME titled, Why It is Time to Retire the 401k http://www.time.com/time/business/article/0,8599,1929119,00.html . It states: ?The ugly truth, though, is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves ? Remember, the biggest factor in whether the 401(k) works as designed has to do with when you retire. If the market rises that year, you're fine. If you retired last year, you're toast. And the chances of your becoming a victim of this huge flaw in the 401(k) plan are pretty high. The market fell in four of the nine years since the beginning of the decade. That means anyone retiring this decade had a nearly 50% chance of leaving work in a down market. In fact, your chances of retiring into a down market are even greater than that: forced retirements spike in recessions just as the stock market is tanking.
  
  The solution: a new type of insurance. Retirement savings, it turns out, are exactly the type of asset we need insurance for. We need insurance to protect against risks we can't predict (when the market collapses) and can't afford to recover from on our own.?
  
  So, the absolute minimum insurance need is to yourself, to protect your life savings from crashing when the market does - which happens on average every 6 years. This in part is why the net gain in an IUL is equal to the market long term - because you KEEP all your gains. When the market goes up again you are NOT recovering, but building gains on TOP of your prior gains! Roth just does NOT get that (but he can?t or he would lose)! Insurable interest - what could be a more important interest than making sure your retirement savings do not disappear - especially when you need to depend on them the most?! IUL is also the BEST College Savings plan there is - accumulating savings without downside market risk AND life insurance if the parent dies prematurely to guarantee funding of college for ALL of their children! I could go on and on.
  
  What about that minimum return guaranty that he claims is: ?nada - in year 26 I could lose my entire amount?. This is another response of ? truths and he knows it. Again, his concern and challenge was just year 10, but here is the WHOLE truth. The insurance companies are required by law to run an illustration based on the account minimum (yes, there is a minimum guarantee of 3% unlike other types of market investments that have none except the fact you can lose all your money) and the guaranteed maximum the co. can increase the internal costs to. They cannot run the illustration based on current costs so it is already wrong in Yr. 1 of the illustration. It is true some companies have increased costs after a policy was issued. But Minnesota (in its 128 year history) and the other companies that issue IUL never have - in fact it is one of a few companies to actual decrease costs in an existing policy.
  
  If you run this illustration with the very likely current costs, the 10 year minimum guaranteed value of the $100,000 is $111,125. It NEVER goes to zero - it always goes up in value. Roth was told this and has the chart, but he lied to you by never telling you this part and instead saying the guaranteed value in the future is zero.
  
  And what about those expenses? Indexed Life takes out the bulk of the fees in the first few years - the exact reverse of mutual funds - and this is why it is slow getting started. As you can see what matters isn?t how you start but how you finish. Even so, Roth can still earn an 8% net by year 10. He asked me in an email why I did not tell him about the dramatically increasing insurance cost in the later years. That is disingenuous and another lie in that these are stated on the charts I gave him, including on the company illustrations he was provided with. I told him if he was going to talk about expenses to also say that the TOTAL expense ratio in year 30 is 0.17% (in yr 11: 0.04%; yr 20: 0.016%). Can you show me another investment with total expense ratios this LOW?! According to Morningstar and Roths own company CBS Money Watch, their recent studies determined the average mutual fund expenses is a minimum of 3.03% per year. Which do you prefer?
  
  Roth says there are things I did not tell him. I find that amusing because it is impossible to tell anyone everything about something in just a few minutes or pages. This is why I sent him a copy of my 330 page book about it, which has a Table of Contents and Index, and he could always email or call me to ask a question (which he did several times). By the way, thank you Roth, there have been many purchases by your regular readers!
  
  Also, contrary to what some have replied, let me note that the strategy proposed to Roth had nothing to do with withdrawing equity from real estate. That is a non-issue in this proposal.
  
  Now what about that LTC statement of mine he says is ? ?ridiculous, not sourced statements such as the odds of a couple age 65 eventually needing to pay for one typical Nursing Home stay for 2 1/2 years, is 100%.? I did not have that reference immediately at my fingertips - he acts as if I?m some sort of computer at his beck and call all day without other things I need to be doing - so I sent him a WSJ article until I could search more. It said: ?More than 50% will need some form of LTC ? at some point in their lives?.
  
  This is what Met Life and the U.S. Government report:
  
  1) About 70% of individuals over age 65 will require at least some type of long-term care services during their lifetime. Over 40% will need care in a nursing home for some period of time.
  U.S. Department of Health and Human Services, 3/2008 http://www.longtermcare.gov/LTC/Main_Site/Understanding_Long_Term_Care/Basics/Basics.aspx
  
  2) On average, someone age 65 today will need some long-term care services for 3 years. While about one-third of today's 65-year-olds may never need long-term care services, 20 percent of them will need care for more than five years.
  U.S. Department of Health and Human Services, 3/2008, http://www.longtermcare.gov/LTC/Main_Site/Understanding_Long_Term_Care/Basics/Basics.aspx
  
  3) Studies indicate that the average nursing home stay is 2.4 years. (Source: 2003 MetLife Market Survey).
  
  So, the likelihood is 2/3rds that someone age 65 will need LTC. Some a few weeks, some a few years - many sources will tell you the average is 2.4 years for Nursing Home Care. If you also include Home Care the average total time of need is about 8 years.. Or look at it this way - when you flip a coin there is a 50% chance either side will come up - and we don?t know which - but there is a 100% chance one of the sides will be on top. With couples there are 4 possible scenarios, and you either need LTC or you don?t. Here the odds are greater at 70% each, but you either have a need or not. Here is a simple way of looking at the only 4 possible outcomes:
  
  1) Each spouse needs LTC: 100% + 100% = 200%.
  2) Husband only needs it: 100% + 0%
  3) Wife only needs it: 0% + 100%
  4) Neither need it: 0% + 0%.
  
  If you add up the columns: 400% / 4 couple needs = 100% chance of 1 need per couple on average.
  
  The typical response I have noted in the past week is Roth does not respond to the positive merits of any of the information I have posted. He completely ignores it and - like a magician - tries to detract your attention away from the real issue to something completely irrelevant. Such as whether or not the well known indexers would approve of my quoting them instead of whether or not index investing in a format without downside market risk has merit and is worth considering. Whereas I have addressed each of his claims directly and with the citation of links directly to the source.
  
  Summary:
  
  1) Depending on your want, an 8% NET IRR is possible short term and long term just using the low cap rates today.
  
  2) In addition, if Roth dies next month, his beneficiary with the IUL will get $340,000 or $380,000 in year 1 - nothing else can do this.
  
  3) If Roth lives whatever the market goes, he keeps ALL those gains earned by the IUL. In retirement (and every year) he will have the peace of mind of knowing in the morning the account will be worth the same as the day before.
  
  With IUL you get guarantees for lifetime minimum, and each year the maximum index gains you are guaranteed will be locked into your account IF the actual index has those gains (or even less, i.e. earn 140%) - something that NO other investment can offer. For Roth to reject the entire concept because I omitted facts (not true) or could not answer his LTC question is like the Wizard of Oz hiding behind the curtain - refusing to acknowledge and state the truth because it does not fit the facts as he wants you to believe them. If I were you I would ask Roth if he will personally guarantee in writing to make up the difference for any of these. That:
  
  1) Your index gains in the open market over a lifetime of saving will never go down in value with the market in any year and in retirement.
  
  2) That you will be able to withdraw your earnings Tax Free.
  
  3) That your income and capital gains increased tax rate risk the rest of your life is zero (because you already paid and are done with them with IUL).
  
  4) That if you die next month or next year or in any pre-retirement year, that he will fund personally the remainder of your beneficiaries retirement savings and/or college fund for all your children.
  
  5) That your investment / Qualified Plan gain withdrawals will NOT increase the tax on your Social Security, which could also increase your Medicare premiums.
  
  All of these are just a bonus - they were not part of the Challenge and in a sense are irrelevant. The Challenge was to show him how he could (not would or guaranteed) - but could earn 8% net with limited downside risk. Indexed Life can do that. How fast it does is entirely his choice. He added the requirement of 10 years - it can do that.
  
  For him to renege on the Challenge now is dishonest, but hey, it is what it is. Like I said, NO surprise. But who is really the snake oil salesman?! Your responsibility of how you invest your savings is to yourself and your family. There is a safe way to invest and earn and KEEP market type gains -- or Roths way where he stated in a response in his prior column that he was against index investing with no risk! Unbelievable!
  
  If you think he reneged on his Challenge, then to all the advisors out there I just request that you reply in a civil fashion with the actual experiences of yourself and your clients. If you want to let his editors know what you think you can email Eric Schurenberg and Jill Schlesinger here: http://moneywatch.bnet.com/about/?tag=about-mw;meet-mw
  
  I achieved my only true goal which was to make more of you aware of Indexed Life and how it could benefit you. The rest is up to you!
  
  Brett Anderson
  

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  10

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  Please answer the following:
  
  1) Did you claim 140% of "market return" when it only returned the index, stripped of dividends?
  
  2) Was the guaranteed value in year 26 of the illustration zero? How much is my insurance cost in that year?
  
  3) Are you still recommending the product Minnesota Life says I have better options to invest without the insurance costs?
  
  4) As to credibility, do you continue to believe that no couple age 65 or older has any chance of dying without one first going to a nursing home?
  
  I know you don't like my findings but stick to the facts, please.

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  11

  Brett A

  10/12/09 | Report as spam

  Challenger Reply - The Facts

  Do you see what I have had to contend with?
  
  1) Semantics - not merit. Somewhere in a conversation I referred to the Index gains as a % of market returns instead a % of the index. Instead of discussing the merits of the product he would rather detour you into not examining it based on its merits but the semantics of the use of a term. The fact is it will credit 140% of the S&P index gain up to a cap of 14%.
  
  2) Using the MAXIMUM possible expenses the policy would go broke in year 26. Who cares? You are cashing out in year 10 because your thinking is limited to only short term and that was the Challenge. And as I keep telling you (and in my earlier reply), the company in 128 years has NEVER increased its expenses after issue so the most likely costs are the current ones, which means the policy in year 26 is worth about $150,000 and going up each year. At some point you need to focus on the scenario that has a 99.99% of being the actual.
  
  3) This is an outright LIE - this is not the honest contetxt of what the Minnesota actuary said to you. Show me an investment with less costs (equal guarantees and potential gains) long term and so a better option. It doesn?t exist. Who cares if there is an insurance need or not (but there almost always is) if the bottom line $ gains will outperform just about anything else - and without the risk.
  
  4) Roth says he is a math geek, but give me a break. Option #4 in my prior answer where there is a zero LTC need can be either because they have no need when alive, or they are both dead and so never have a need. The result is the same: every couple age 65 on average will have to pay for 1 average Nursing Home stay of 2.4 years. The average age of need is 82. About ? of those alive at 65 will be alive at 80. The incidence of Alzheimers after 85 is almost 50% http://www.google.com/hostednews/ap/article/ALeqM5j-w-6Cr0WdQy9AddjtDPvVZqxA8AD9ARFL9O0 .That care need on average is about 7 years.
  
  But again, this is just DEFLECTION from the REAL issue at hand because he cannot address directly the MERITS of Indexed Life in any way so as to show that the potential gains with IUL as they pertain to the Challenge are not valid. He says I should stick to the facts, but all of my points are made with historical index facts, company projections and links to actual sources. NONE of his are.
  
  It is your retirement, your savings. What I did NOT read was his agreeing to guaranty with his money that your savings will perform as well as they would in what he prefers vs. an IUL plan.
  
  There is an old saying, Put Up or Shut Up. It is time for Roth to do one or the other.

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  12

  Brett A

  10/12/09 | Report as spam

  Minimum Gains PS

  Roth is making a big deal out of the minimum guaranty - so lets look at the actual 10 year historical gains of the actual S&P Index and the hypothetical IUL gains. As you can see on the chart, the lowest 10 year IRR for the current cap of 14% (and 140% participation rate) is 1978 and 5.67% when the actual index 10 year IRR was 0.11%. The lowest 10 year gain for the S&P was -0.31%. You can see the running average with the IUL - pick your period. The average for almost every 5 year period is for more that the rate used to run the IUL illustrations - some are for as much as 1.5% (10.7% vs. 9.2%) more than I ran it at to get 7.49% net. Based on these actual historical returns of the S&P the liklihood of the IUL have an 8% NET IRR by yr 10 is probably over 80%, and the other 20% is in the 7% range.
  
  http://www.keepandshare.com/doc/view.php?id=1453133&da=y
  
  But the hypothetical minimum of 3% (1/2 the lowest actual ever 10 year IRR) with maximum costs (never charged in 128 years) is $0 in year 26, so I guess that is THE reason that matters as to why you should not consider an IUL for the most important savings decision of your life.
  
  Brett Anderson

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  13

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  The length of your comments is long but the discussion of facts is short. I will note a few parts where you did address facts:
  
  1) market return vs. index return - you believe that stripping out half the returns is semantics. I disagree.
  
  2) "Who cares about maximum expenses?" I think the policy holders you have sold these products to should care in the context of your guarantee.
  
  3) "this is not the honest context of what the Minnesota actuary said to you." As you know, you weren't part of the conversations nor copied on all of the emails. You are again making up facts.
  
  4) "The odds of a couple age 65 eventually needing to pay for one typical Nursing Home stay for 2 1/2 years, is 100%!? You are claiming no couples will die without at least one first going through a nursing home. This is downright silly to try to defend.
  
  5) "Show me an investment with less costs (equal guarantees and potential gains) long term and so a better option." If you read the column, you'll note how I used a similar strategy to that used by Minnesota Life, without the costs of insurance, commissions, overhead, profit, and taxes. It's economically superior as it intermediates both you and the insurance company.
  
  I think we can agree to disagree in that Minnesota Life and I think both an insurable need and disclosure of costs should have been mentioned up front by you. I also think you should not have omitted facts like Minnesota life having the unilateral right to lower the caps to as low as 3%.
  
  I would buy this product in a minute, if it worked for me.

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  14

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  If anyone (other than insurance producers) doesn't get this - take a step back. Minnesota life has their portfolio 87% in fixed income and 13% in equities and the like. How could it pay market returns when most if it's portfolio is in fixed income? It must first pay a commission, cover overhead and taxes, and then make at least some profit (it's a mutual). What's left is what the policy holder will get.

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  15

  Brett A

  10/12/09 | Report as spam

  Deception Again

  Roth keeps proving to me over and over that he cannot read or refused to understand. As stated above (and several times) all the companies take their share of the interest earned off the top and then take the interest you would normally be credited with and use it to purchase options for the index(s) instead. The profit margin they earn is basically fixed. So with rates at historical lows, as the rates on the bonds increase in the future there will be more available from your share to purchase options which means in the future the caps and/or participation rate can increase. How much you are able to earn with the options is not really relevant to the co. - they have already taken their profit. For them it is a $0 cost/profit and they don't really care.
  
  They do not make an additional profit (or loss) on exercising them on your behalf - they do not share in the gains as a result of the options. The companies for their share typically earn a gross of 2-3% from the bonds, and from this they deduct their overhead costs and earn their net profit. There is also a profit made from the mortality costs - this is all regulated.
  
  What you need to know is the companies are not paying you 14, 16% directly from their investments - but from the exercise of options purchased with the 3, 4, 5% that would normally go to you. The option costs and returns are determined by the marketplace and currently this is what they are. Roth knows better and how this works - he is just trying to pull a deception trick again because he really has no basis to refute Indexed Life and the real, potentail gains with no market type risk.
  
  Brett Anderson

•  
  16

  Brett A

  10/12/09 | Report as spam

  LTC

  "The odds of a couple age 65 eventually needing to pay for one typical Nursing Home stay for 2 1/2 years, is 100%."
  
  Roth is the one who is being silly -- it says the odds -- meaning the average liklihood is for each couple age 65 there will be 1 average LTC expense. As I showed in my prior reply for some couples it will be 2, others 0 - but the avg. will be 1. I do NOT say every couple will end up having to pay for 1 incident.
  
  See what I mean? Roth is more concerned with semantics than the facts and merit of the real issue.
  
  I did not say expenses were a non-issue. This is why they have been disclosed to you from the start. You are the one who continually takes them out of context such as what the total % of expenses are relative to the account value.
  
  Roth says that stripping the dividends out of the gains at an average of 2.2% is 50% of the potential gain. Boy, if it is 50% and my net on the investment otherwise is only 2.2% I want to stay away from that. Again, semantics. Show me an investment where bottom line you can earn 8% NET with no market risk and dividends included or not. If Roth can do it with something that has market risk, good for him. But that was NOT the Challenge - the Challenge was to show how it could also be done with limited market risk. I did that.
  
  Roths whole decision is based on technicalities of what was said and what was disclosed or not - NOT the merits of the actual NET return of the investment. Bottom line is it shows no integrity.

•  
  17

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  Options are a zero sum game. If you are arguing for derivative investments, may I point out the recent financial crisis and the fact that AIG would have gone into bankruptcy without taxpayer bailouts.
  
  Minnesota life recognizes the weighted average returns but notes that new money is not necessarily invested in this 87% fixed income, 13% equity average mix it has now.
  
  As far as your personal claims of "deceptions" and "lies," remember that you are also accusing Minnesota Life of these actions.
  
  Personally, I found the communications from Minnesota life quite crisp and transparent. I hopefully showed in my column just how impressed I was with the company whose product you recommended for this challenge.
  
  Please feel free to address the five points in made in comment 13.
  
  As far as the personal attacks you are now making, I agreed with your earlier statement "I think some of those who've responded to your column need to calm down - being upset just keeps people from listening to the merits of both sides, and achieving the real goal of a solution to today's investment problems."

•  
  18

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  If you are arguing that your statement below doesn't say every couple over the age of 65 will have to pay some nursing home costs, then I can see how you believe the IUL delivers what you stated.
  
  "The odds of a couple age 65 eventually needing to pay for one typical Nursing Home stay for 2 1/2 years, is 100%."
  
  Your logical conclusion is based on a different set of rules than society uses.
  
  You may then believe half the market return and a total loss of one's principal does equal market return and NO downside risk.
  
  

•  
  19

  Brett A

  10/12/09 | Report as spam

  More Deflection - Where is the Beef?

  I already addressed the questions in #13.
  
  Derivatives and government bailouts have nothing to do with IUL and the challenge - again more deflection away from the merit of IUL. Minnesota Life with a Comdex rating of 95% is among the top 5% of combined ratings for Insurance Companies.
  
  I am not accusing Minnesota of deceptions and lies - you have taken what was said to you out of context to validate the answer you need to renege on this Challenge. You also keep trying to show that I have no credibility by trying to give meaning to words I said about LTC, that are not valid. Your 2nd grader can see that. I consider that a matter of integrity - that is not calling names.
  
  Again, I do NOT see any guaranty from Roth that your investments will perform as well as IUL. The fact is $1 in the S&P index 10 years ago - with no expenses - is only worth about 70 cents; with avg. expenses of 3% it is only 50 cents today. In an IUL it could be worth $1.50 or more!
  Which would you rather have?!
  
  
  Brett
  
  
  
  

•  
  20

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett says:
  
  "The fact is $1 in the S&P index 10 years ago - with no expenses - is only worth about 70 cents; with avg. expenses of 3% it is only 50 cents today."
  
  Brett is correct that when you compare something bad to something worse, the "bad" looks better.
  
  Who except Brett would suggest a client invest in the S&P 500 index, which is stripped of dividends? As noted in the column, a 60% equity / 40% bond index fund earned 44.4% over the past ten years, after costs.

•  
  21

  hikinganimal

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Well, let me stick my toe in the water. I am another agent that sells the IUL...I am not a snake oil salesman. I believe I am providing honest and valuable options for retirement. I read the Time article on the 401...and yes, they talk about insurance as an option.
  
  I do not favor those who choose to insult others in their opinions.
  
  Taking money out of home equity to fund the policy is one strategy that has gained favor with some. The equity just sits there doing nothing, and putting some of it into a growth vehicle is smart investing.
  
  These policy's have caps and guarantees. Caps are usually 12% to 15%. My example illustration would be guaranteed with a 2% gain for 20 years before the policy lapsed. But what would make it meet that condition would be 20 years of the market steadily declining, and I contend were that to happen we wouldn't have any economy at all anymore.
  
  I don't work with Brett's Insurance co. I ran an illustration just to see the numbers from my company. With a sample non MEC policy, if you, age 52, put $20K in for 5 years, and wanted to pull out as much as you could, (and not cause it to lapse), starting at age 65 for 30 years (presuming death at 95) your $100,000 would have returned you $652K. You would have taken out about $21,750 per year for 30 years. And while doing this you still have in addition a death benefit of $388K. This all assumes that over the 30 years we experience the positive of about 7% average that is indexed to the S&P500.
  
  If, with the same scenario, you did not take out any money in that 30 years and let it ride, at 95 you would have accumulated a Cash Value of $2.3 million, with a corresponding Death Benefit of $2.3 million.
  
  It is hard to imagine anyone who does not have an insurable interest of some kind or other.
  
  

•  
  22

  Allan Roth

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikinganimal,
  
  Thank you for your respectful disagreement and your points. It's nice to have a discussion on the issues.
  
  I have a differing opinion on your points:
  
  1) Regarding home equity, many homes are now under water with the logic that one should tap all the equity they can on a home.
  
  2) Regarding your scenario, I have seen hundreds of illustrations on dozens of flavors of cash value life insuranace. Very few have lived up to those illustrations.
  
  We have a professional disagreement on these issues.
  
  Thanks again for your comment.

•  
  23

  Brett A

  10/12/09 | Report as spam

  Insurable Benefits

  Hmm, is Roth now saying he is opposed to Indexes for investing - that a 60% equity / 40% bond mix would have been best? I thought he was a Bobble Head? Or was that last week? First, here is a recent article in the NYTimes on a Morningstar report, that states - again - that the S&P 500 index over long periods of time outperforms almost all equity funds: http://boss.blogs.nytimes.com/2009/08/28/active-vs-passive-the-debate-keeps-going/?ref=your-money . They write: ?only 37.1% of actively managed funds made up of large-capitalization stocks beat the category?s benchmark, the S.&P. 500. Most large-cap investors would have done better with a plain old S.&P. 500 index fund?. Here is the link to the actual report: http://www2.standardandpoors.com/spf/pdf/index/SPIVA_2009_Midyear.pdf
  
  The problem with equity investing - as we have all been reminded the past decade - is they are not really gains until you take the money off the table (out of the market), which means thereafter you have an opportunity cost relative to Indexed Life gains in the future.
  
  What about bonds? Many experts say it is not a smart thing to be investing in long term bonds currently because of major principal risk -- as interest rates rise from their current record lows your principal value will only go down in value.
  
  One of his reasons for reneging on his word is that unlike the other 99% of us he says he does not have any insurable interest. How about this one for most of you: another potentially major benefit of IUL is an Accelerated Death Benefit. If you are diagnosed as terminal Minnesota Life has one of the best benefits - they will advance to you up to 95% of the insurance benefit up to $1 million that you can use for any purpose - include treatment that may save your life that no other insurance you have will pay for. In another reply I also went into the insurable interest of knowing your savings will not go down in value because of the market - aren?t these both important insurable interests that we all have?!
  
  Again, as I said before, the Challenge was NOT to outperform what he believes is another, better way to invest. The terms were ONLY to show him how he could ALSO earn market type returns BUT with limited downside risk. I did that. You can go back to his column and read it for yourself: http://moneywatch.bnet.com/investing/blog/irrational-investor/why-so-critical-on-annuities/563/ ). Roth does not address what Indexed Life does and can do - only these side issues like LTC where he twists the facts or ignores whatever does not suit his decision. Or real benefits such as gains taken out of an IUL do not increase the tax on your Social Security or Medicare premium.
  
  Roth has not put up anything that can offset these many other benefits with greater real returns. He has not said anything I?ve said about Indexed Life is not true. Only that I did not explain everything about everything therefore he says ?you have no credibility?. So he doesn?t have to honor his promise. Again, no surprise. My participation in this discussion is over - I am busy with investors and advisors who want my help and I don?t have time to keep answering the same questions. From hereon it is up to the rest of you to call him on his decision and deflections - or not. If you wish to contact me direct you can do so at brett@lastchanceretirement.biz .
  
  Brett Anderson

•  
  24

  mfinder

  10/12/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Well, this was a real shocker! Not only did Brett loose the challenge( hard to win a challenge when the rules keep changing). Easy to win a challenge when you make the rules. As I suspected, we were treated to at least 2 references to his "second grader" principle outlined in "his Book". Brett, the people,er, those "snake oil salesmen" know the truth because they are in the trenches actively saving futures nor bloviating from the blog pulpit. As I said in my last post he is the Teflon Investor because nothing you tell him sticks. And my metaphor of the painter who painted himself into a corner, well, Allan just walked out leaving a very messy trail of footprints, a sign of a true craftsman. Nonetheless, take heart in the fact that his "clients" were following along as well and even though you'll never hear it, all of this will ultimately have a negative impact on his bottom line as his integrity is already highly suspect. Good job Brett!!

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  25

  finnetusa

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  What surprised me the most is the way Mr. Roth deflected from the facts. Mr. Anderson is a man of integrity that proved his points and then some! With all the many benefits that Minnesota Life brings to the table, why would anyone put their money in the stock/bond portfolio? What Mr. Roth also fails to mention is that over the last 10 years, which investor would open their annual statements and find their account values have dropped? Then what? Panic? Sure, it's the human thing to do. Did the IUL EVER drop in value? It could have been "underwater" in the first year or so, I don't know. But if the illustration is shown to the buyer, and explained properly, then they are prepared. But when was the last time any investor saw a projection from a growth vehicle that showed a negative return on a year over year basis? Sorry Mr. Roth, but you deflect and change the facts to suit your needs....ever thought of politics?

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  26

  Dylan R

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  After reading this and the subsequent comments, two
  phrases come to mind: "sore loser" and "drinking the cool
  aid."
  
  If indexed life insurance is such a great investment, why
  isn't it more main stream? Why do insurance agents face
  such an uphill battle to convince others that its so great?
  Why isn't it embraced by the academic, financial journalist,
  or fee-only financial planner communities?
  
  Do people learn all about these products and then decide to
  become agents to sell them, or do they become agents first
  and then learn how to sell these products? Why do
  insurance companies have to pay such high commissions to
  in order to get people to sell them?
  
  Doesn't even the existence of these questions give the die
  hard advocates of indexed life insurance any pause to
  contemplate the possibility that they might be, even a little
  bit, wrong? Or do you already have an answer for all them
  that make perfect sense to you?

•  
  27

  larry swedroe

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Just a few thoughts
  
  As I act in effect as the director of research for over 100 RIAs around the country I get asked to analyze many investment products. Most of these come under the broad category of what are called structured notes. I have written about some of these in my blog here at moneywatch. These products typically are complex products typically with embedded options. EIAs come under this type umbrella.
  
  Now what the issuers of the policies know and count on is that the average investor cannot properly value the embedded options. Even with the add of a Bloomberg calculator I have found many professionals cannot even value them they are so complex. But the key is that you don't even have to be able to value them because you can be 100 percent certain, not 99%, that the complexity is designed in favor of the issuer.
  
  I have reviewed probably over 100 of these over the years and every single one was priced to favor the issuer, exploiting the buyer. Typically these are underpriced by from as little as 3% to 12% or even more.
  
  EIAs are among the worst abusers. And insurance policies like the one described, with embedded options (like capping upside while limiting downside) are always mispriced to favor the issuer. The investor is selling the options (typically the caps) WAY TOO CHEAPLY.
  
  The issuer (wicked witch) is waves the shiny apple (the downside protection) in front of Snow White (the uninformed buyer) and they take a bite, unaware of the poison inside.
  
  All one has to do is ask the simple question: Why is the issuer offering me such a bargain? Do they like me? If they are paying me such a great return doesn't that mean that they are having to raise capital at a higher than necessary cost? And issuers are not in the business of doing that. It is really that simple.
  
  As Allan showed here in his example, every single one of the products I have seen can be reverse engineered to show the issuer is charging above market prices for the product. EVERY SINGLE ONE. There is no need ever to buy such products and as Allan correctly pointed out in each case there is a more efficient way to construct the same transaction on your own, avoiding the expenses and profit margins of the issuer.
  
  If you need insurance, you buy it for the purposes you need it for. Investing and insurance should not be mixed or you will be paying excessive costs.
  
  

•  
  28

  Allan Roth

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  1) Do you dispute that Minnesota Life does not recommend this product for someone that does not have an insurable need?
  
  2) If this product really could deliver "a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk," why wouldn't institutions be able to design a similar product to deliver these returns?
  
  3) Regarding your comment #23 and your reference to the NY Times article, why do you continue to say "the S&P 500 index over long periods of time outperforms almost all equity funds," when the article actually sites the S&P 500, which includes dividends. I thought you had already conceded that you improperly called the S&P 500 INDEX the market, when you knew it was stripped of dividends.
  

•  
  29

  Allan Roth

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Larry does a nice job of discussing this in his book "The Only Guide to Alternative Investments You'll Ever Need."
  
  Even if Larry were wrong and the insurance company did not price the product properly, they have the unilateral right to change the cap, as noted in this challenge.
  
  I have yet to have an insurance producer explicitly point that out. I've never met a policy holder that understood this unilateral right given to the insurance company, even though they signed a document saying they read all disclosures. buried in the disclosure is where this fact lies.

•  
  30

  DougDiggerEberhardt

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  I didn't see the agent address the issues of the insured living too long or the potential of a lost decade for investments and how that might affect current illustrations/assumptions.
  
  People are living longer. Mortality tables have been updated in the past to reflect this, and will be updated again. While this may lower the cost of insurance some for the insured, it also means that the cost of insurance will eat away at the principal for many more years as people live longer lives because of medical advances. http://www.redorbit.com/news/health/1763803/more_than_half_of_babies_could_live_to_age_100/index.html
  
  This means that the insured could end up living longer than expected (many will) and end up with the potential of taxes having to be paid on the policy if it were to lapse. There are no guarantees that resolve this issue of living too long that I'm aware of just like there are no guarantees that the insurance company won't raise expenses or lower crediting rates on the S&P index in the future. Granted there could be a rider added to a policy at a cost (if there is such an animal).
  
  The other aspect to this is what "if" the S&P went through a lost decade (or two) ala Japan's Nikkei Index? Who is to say it won't occur? Can you guarantee to the insured that it won't occur?
  
  This potential would throw the "current" illustration down closer to the guaranteed minimum of 3% (not talking about guaranteed insurance costs here) which many insurance companies are struggling with paying today as the 10 year bond is only paying just over 3%.
  
  Minnesota Life's 5 year yield on invested assets is 5.04% compared to an industry average of 5.52% according to Vital Signs financial data: http://www.lifelinkcorp.com/vitalsigns/about.asp
  
  The 2008 total investment return was 2.65% for Minnesota Life compared to the industry average of 3.36%.
  
  49% of the bond portfolio is invested for 5 years or less. "If" we continue the current low interest rate cycle, the proceeds from the maturing bond portfolio bonds will struggle to find returns that keep pace with company expenses.
  
  Minnesota Life's one year growth on total admitted assets is -17.3% and three year compounded growth is -2.9% (2008).
  
  Total Surplus and AVR is -19.2% and three year compounded growth is -3%
  
  This data tells me that Minnesota Life is having trouble keeping up with current costs which is confirmed in the fact that their returns are below industry average by a significant half a percent.
  
  On the Minnesota Life balance sheet, 12.9% of their invested assets are in mortgages. What are the chances that some of these default, especially if they are commercial real estate (see Japan's history for answer).
  
  Hard to keep the general account paying salaries and company expenses when returns don't turn out as projected just a few short years ago.
  
  Lastly, the S&P itself historically has secured most of its 10% annual return (sans the last decade) from dividends which companies are presently paying in the 2% range. This means that to achieve an 8% return, the remaining 6% has to come from capital growth.
  
  The only thing growing in this country is government spending which is the only catalyst for GDP at present. But that's a whole different conversation.
  
  I'd just like the agent to admit that if the individual lives too long, these policies could come back to bite them with a huge tax bill on all tax-free income taken (if policy was kept under the IRC 7702 guidelines) and that current policy projections are not indicative of future results (which I know you tell all potential buyers). And lastly that this product may require more funding down the road to obtain desired results if the market doesn't perform as expected.
  
  My point is, there are no real guarantees as we don't have that crystal ball to consult and there's risk in not knowing what may or may not happen. It's not all black and white, sign here.
  
  That said, people will buy anything you put in front of them because they like you! lol
  
  

•  
  31

  DougDiggerEberhardt

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Allan said: "Even if Larry were wrong and the insurance company did not price the product properly, they have the unilateral right to change the cap, as noted in this challenge."
  
  I agree Allan. This is the loss of control that I don't want to give up as an investor. The game can be changed at anytime to benefit "the company." Not that companies are out to screw their clients, but they are in the business of making money and if push came to shove, it would be at the expense of the insured.
  
  
  
  

•  
  32

  Allan Roth

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  DougDiggerEberhardt
  
  You make some really great points - thanks.
  
  Much like 2/3 of people returning from Las Vegas think they made money, I suspect that people hold on to the illusion they can make stock market returns without risk.
  
  The logical conclusion from these beliefs is that Casinos and Insurance companies exist to pay us money.
  
  Pretty hard to defend that conclusion.

•  
  33

  hikinganimal

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  OK, I am afraid that nothing I say will have much impact on some of you?.but I went ahead to my sample illustration and increased the life expectancy to 120 instead of 95 should the client ?live too long?.
  
  The numbers continue to grow. You would still be able to pull out $21,750 (tax free) every year until age 120. In fact, if you chose to, you could take out much more every year?.say $50,000 or $100,000?.but that would require another illustration, so I won?t go there. At 120, were my client to die with the original annual withdrawal of $21.75K, the cash value of the policy would now be $2.7M and the death benefit $2.9M.
  
  Insurance companies have to make money to remain in business. Mine is almost 400 years old?they must be doing something right.
  
  I have no answer for your concern over changing cap rates, nor preference to equity and bond investing. I hope that it?s not that you just don?t trust insurance companies or insurance salesmen.
  
  I have a fiduciary responsibility to my clients, and take that very seriously. I would never advise a client to pull all his equity out of his real property. Indeed, if he was ?upside down? he would have no equity to use.
  
  Everything should have balance. Investing $100,000 I hope would only be part of your portfolio leaving you free to engage in any number of other investments.
  
  And, Allan, I would like to know how very few insurance companies have not lived up to their obligations of cash value in their policies.
  
  Distrust of the insurance industry has increased because of such huge blunders as found with AIG last year. However, their life insurance, fire, health and other standard insurance divisions were very profitable...the London division, their financial investments division, which engaged in insuring bundled mortgage securities, is what brought them down.
  
  
  

•  
  34

  Dylan R

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Insurance companies have to make money to remain in
  business. Mine is almost 400 years old?they must be doing
  something right.
  
  Right by who?
  
  How can someone have a fiduciary responsibility to their clients
  yet act as an agent for the other party in the contract at the
  same time?
  
  There is nothing wrong with insurance; it is what it is. But
  when people try to artificially make it into something that it is
  not, it becomes problematic.

•  
  35

  DougDiggerEberhardt

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikingandimal,
  
  What interest rate did you use for your current illustration?
  
  Did you start with a lump sum of $100k in this example making it a MEC or did you do the five pay under the 7702 threshold? I assume it was five pay as that is the only way tax free income could be withdrawn. If five pay, what was the amount contributed each year? What age? Male or Female? If you already posted some of this, let me know.
  
  Obviously it's difficult for me to analyze without seeing an illustration, but I appreciate your response.
  
  

•  
  36

  Allan Roth

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikingandimal,
  
  When you statement:
  
  "And, Allan, I would like to know how very few insurance companies have not lived up to their obligations of cash value in their policies."
  
  What I mean is that when client come to me with cash value policies, I ask them to bring the illustration shown to them when they bought the product. I don't believe I have seen one that showed an expected cash value that was matched by an actual cash value.
  
  I often ask insurance company officers, including the one at Minnesota Life, if they have ever done a study to compare the illustration shown to a client when they bought the policy vs. the actual.
  
  For example, it would be really easy to compare all illustrations on policies sold in the year 2000 to their actual value in 2009. It could show that, on average, the illustration amount was 76.2% of the actual amount. If I'm wrong, the number would be 100% or higher.
  
  It's just me but, if I were an officer of an insurance company, I'd do such a study and use the results as a marketing tool, if the numbers look good.
  
  I continue to appreciate your great comments and questions.
  

•  
  37

  Allan Roth

  10/13/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  I asked you three factual questions which I have not responded to. Could you kindly address these?
  
  1) Do you dispute that Minnesota Life does not recommend this product for someone that does not have an insurable need?
  
  2) If this product really could deliver "a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk," why wouldn't institutions be able to design a similar product to deliver these returns?
  
  3) Regarding your comment #23 and your reference to the NY Times article, why do you continue to say "the S&P 500 index over long periods of time outperforms almost all equity funds," when the article actually sites the S&P 500, which includes dividends. I thought you had already conceded that you improperly called the S&P 500 INDEX the market, when you knew it was stripped of dividends.
  

•  
  38

  hikinganimal

  10/14/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Allan, as an agent, I would like to see a comparison study of the illustrations also. That would be good information for all of us.
  
  Doug, you may go back and reference my posting #21.
  
  Dylan, I fail to see where I am being artificial. If my product does not please you, do not buy it. I am basing my projections on what is given to me by what I presume to be bonefide calculations from a well established company.
  
  

•  
  39

  Dylan R

  10/14/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikinganimal, I never said you were being artificial. I said
  insurance sales become problematic when insurance is
  artificially presented as something other than insurance, such
  as an alternative to owning securities. In other words, my
  observation is that distrust of the insurance industry stems
  more from deceptive sales practices than from the insurance
  itself. If you are not pitching insurance as something other
  than insurance, than there is no reason think you are being
  artificial.

•  
  40

  Allan Roth

  10/14/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett Anderson notes:
  
  "My participation in this discussion is over - I am busy with investors and advisors who want my help and I don?t have time to keep answering the same questions. From hereon it is up to the rest of you to call him on his decision and deflections - or not. If you wish to contact me direct you can do so at brett@lastchanceretirement.biz."
  
  Mr. Anderson has time to write comments that seemingly never end (such as #9) but now no longer has time to participate in this discussion. Perhaps I'll write one more column on his claim that I was not truthful in stating Minnesota Life did not recommend this product recommended by Anderson for those like me without an insurable need.

•  
  41

  DougDiggerEberhardt

  10/14/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikinganimal,
  
  Appreciate the response.
  
  Please consider the following when advising clients.
  
  You're telling me that the illustration shows a male age 52 putting in 20k a year for five years will give him 30 years of income at age 65.
  
  Part of this income will come from the policy growth at the assumed rate of 7%.
  
  My request was to see what income they could take out if the policy averaged 3%, the minimum. Not the "guaranteed insurance cost column minimum," but the "current cost with a 3% return."
  
  My reasoning (among many others) is:
  
  Mish Shedlock: "Expecting 8 percent returns when 30 year treasury bonds are yielding 4%, the dividend yield of the S&P 500 is 2%, and the S&P 500 trailing PE is 138.97, is amazingly foolish."
  
  http://globaleconomicanalysis.blogspot.com/2009/10/five-major-pension-problems-one-simple.html
  
  Same goes for 7%.
  
  I am simply addressing the reality of today and also the "potential" of a lost decade or two ala Japan as well as the fact that the S&P is only paying 2% in dividends. If the S&P was dishing out 6% dividends, then I'd be closer to saying ok.
  
  An investor doesn't have control of the money as it is invested for me by the insurance company in the S&P index only. There is no flexibility for me to choose other asset classes to take advantage of market conditions. While there is downside protection, I want to see my money grow during the time frame the stock market is in a down trend (like last year). Whether this is in cash, shorting the market via inverse ETFs, Rydex Mutual Funds, or whatever, I want control. Variable Life doesn't give me this full control and flexibility either and obviously no guarantees.
  
  If I'm 52 and have 13 years of investing, I don't see the next 13 years being that easy to get a 7% average return on the S&P at all. I also can't afford to have a few years of zero percent return. This of course changes the entire income stream projections which can't be accounted for in the illustration.
  
  You cannot guarantee me 7%.
  
  You cannot justify 7% in today's investment environment.
  
  3% I would accept.
  
  But I'd still rather have control.
  
  And there's still the issue of the insurance company (Minnesota Life) having to pay the minimum 3% guarantees as well as company expenses when it's not even earning 3% on admitted assets (2.65%) and has double digit negative growth (-17% - 2008).
  
  Lastly, those older than age 52 would have higher insurance costs eating away at the return and thus a lower income than the 52 year old you illustrated even with the 7% return.
  
  But hey....if they like you and trust you, they'll buy! You got that going for you!
  
  
  

•  
  42

  Brett A

  10/14/09 | Report as spam

  The Lost Decade of Stock Investing

  WSJ 10-14-09: The Lost Decade of Stock Investing
  
  "Advisers sold us a bill of goods about the lasting value of real estate and stocks."
  
  "If you invested $100 in the S&P 500 at the end of the last decade, you're happy with Dow 10000 but still hoping for a 34.5% rally before year end -- just to break even. You'll need a staggering 72% rally when adjusting for inflation."
  
  http://online.wsj.com/article/SB125556534569686215.html

•  
  43

  Allan Roth

  10/14/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  When you quote:
  
  "If you invested $100 in the S&P 500 at the end of the last decade, you're happy with Dow 10000 but still hoping for a 34.5% rally before year end -- just to break even."
  
  you qoute another verifiably false statement. You are only including the index, not the S&P 500 you stated. You keep making this claim that the index is the stock market rather than part of the return of part of the stock market. The Vanguard S&P 500 index fund lost 12.5% since 12/31/09.
  
  I think there are much better funds S&P 500 funds with more diversification and costs that are also dirt low.
  
  I write about all sorts of bad investment advice from illusions of risk free stock market returns from insurance to expensive mutual funds with bad behavior. It seems as though you are really trying to set the bar really low to make your product look really good.
  
  I understand you have spoken to Minnesota Life about my conversations with them. Now that you are back on this discussion, do you still dispute that Minnesota Life does not recommend this product for someone that does not have an insurable need?
  
  
  
  
  

•  
  44

  Allan Roth

  10/14/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  Goof in my prior post - The Vanguard S&P 500 index fund lost 12.5% since 12/31/99. I incorrectly said 12/31/09. Your quote of a 34.5% loss this decade only includes the index return and not the full S&P 500 return.

•  
  45

  AztecTheRed

  10/15/09 | Report as spam

  From the peanut gallery as a fee-based planner

  Just 2 cents from the peanut gallery;
  
  2) If this product really could deliver "a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk," why wouldn't institutions be able to design a similar product to deliver these returns?
  
  A) 'Institutions' can (you already know the 'not-so-secret sauce' of using a discounted bond for the gaurantee, with a derivative hedge for the upside growth to the index,) but they only have two ways to make it tax-free;
  1) Inside a cash value life contract,
  2) Inside a ROTH account.
  
  Few individuals have ROTH accounts of sufficient size to attract the securities salespeople who are skilled enough to manage the fixed-and-derivative strategy required.
  
  B) If the entire point of the "challenge" was a net return of 8%, why is the topic of dividends versus index even a concern? The EIUL delivers an "interest rate" like a CD (or more exactly, an indexed CD with a floor, and tax-free treatment.) The entire argument about what is counted on the index side is a circus sideshow... it is irrelevant to the net-8%-delivered challenge.
  
  
  there are no guarantees that the insurance company won't raise expenses or lower crediting rates on the S&P index in the future.
  
  C) Without a protective contract rider (and its concurrent costs,) this is indeed one 'risk' that an EIUL strategy incurs... however, when compared to the risks of market timing, and the probabilities of finding your securities account is needed for living costs when the markets are on a down-cycle... many people find the established life insurance companies more reliable than the free and unfettered stock market.
  
  
  Mish Shedlock: "Expecting 8 percent returns when 30 year treasury bonds are yielding 4%, the dividend yield of the S&P 500 is 2%, and the S&P 500 trailing PE is 138.97, is amazingly foolish."
  
  D) I love seeing you quote Mish... he's a good friend of mine, and great fun to chat & brain-tussle with!
  
  NOW... as nobody has brought up so far, the Minnesota Life EIUL contracts (and indeed almost all EIUL contracts) offer the contract owner the option to switch from a "index participation" strategy to a "fixed credit" strategy at various intervals... some quarterly, some annually at anniversary. The particular contract debated here is a 5% fixed account, IIRC.
  
  This clearly blows the doors off of most tax-free-access fixed-credit alternatives currently.
  
  
  You cannot guarantee me 7%.
  You cannot justify 7% in today's investment environment.
  3% I would accept.
  But I'd still rather have control.
  
  
  E) You certainly have more control in an EIUL than you do in an loss-vulnerable equities account. You may give up some "homerun" opportunity above the cap, and in return are assured a zero market loss reality.
  
  
  do you still dispute that Minnesota Life does not recommend this product for someone that does not have an insurable need?
  
  F) Can't speak for Brett... but certainly if a person has no insurable need, they have no dependants, no taxes to avoid, no expectation of taxable retirement income, no concern (or an ignorance of) market down cycles, and no real assets to protect (let alone $100,000 available funds for a 10 year "hands-off growth" period.) For such a person, EIUL is certainly no real conversation... and 8% net return on nothing is a circleshirk.
  
  
  The Equity Indexed Universal Life growth strategies are by no means appropriate for EVERYONE, and "one size does not fit all".... however, they are so flexible in their strategy design, and so potent in their benefits, that it is a very rare few who have a desire for financial independence who would NOT benefit from having a portion of their balance sheet structured into a customized EIUL strategy.

•  
  46

  Allan Roth

  10/15/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  AztecTheRed
  
  Interesting comments.
  
  1) I think 2008 proved institutions were not immune to risk. No institution would own Treasuries if they could get 8% without risk.
  
  2) The use of the claim of market returns when referring only to a part of the market is part of the illusion of these products. Brett continued this illusion as of yesterday. The crediting is based on the S&P 500 index so it is very relevant.
  
  3) A unilateral risk that someone can cut the cap by more than 80% is something I don't recommend. I also don't recommend timing the market as you note.
  
  4) Comparing the EIUL to equities is inappropriate. Look at the Minnesota Life Balance sheet and you will see it's 87% fixed income.
  
  5) One should self insure for something they can afford to lose - much more cost-effective.
  
  6) There are better ways to manage income and estate taxes than an EIUL or annuity.
  
  One pattern I'm noting is that Brett and others compare this product to something really bad and it suddenly looks pretty good. Yes - An EIUL and annuities did better than a Madoff investment.
  
  Finally, I'll give you 150% of the total S&P 500 return if you give me the unilateral right to change the terms. I'll bet you won't take me up on this $100K challenge.
  
  Thanks for your comments - good discussion.

•  
  47

  Bosola

  10/15/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Allan,
  
  I just want to mention how grateful I am both for your analysis
  and for preserving the full discussion in these comments. As a
  result, I see pretty clearly one hard-nosed analyst and one
  snake oil salesman with a vicious streak. It's been most
  illuminating. I look forward to reading your column in the future.

•  
  48

  AztecTheRed

  10/15/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi Allen,
  
  Hi Allen,
  
  Some further banter;
  
  1) I think 2008 proved institutions were not immune to risk. No institution would own Treasuries if they could get 8% without risk.
  
  Yet an incredible great number of institutions hedge their accounts along virtually the identical strategy as the EIUL programs. Creating the underlying stable "leg" of an arbitrage or a growth hedge is the most fundamental key... and frankly, I advise my individual clients to learn their risk-management from the philosophies of the most successful institutional managers as well.
  
  Build your baseball lineup primarily with base-hitters, and pepper in just one or two fence-swingers... as the fence swingers strike out as often (or more often) than they actually get on base, let alone knock it out of the park.
  
  
  2) The use of the claim of market returns when referring only to a part of the market is part of the illusion of these products. Brett continued this illusion as of yesterday. The crediting is based on the S&P 500 index so it is very relevant.
  
  Maybe relevant to some level of journalistic drama... but not relevant to the initial bona fide challenge... at least according to what you both mutually acknowledged was the initial challenge.
  
  
  3) A unilateral risk that someone can cut the cap by more than 80% is something I don't recommend. I also don't recommend timing the market as you note.
  
  I'm with you here... and as conceded, it is a risk to be weighed, no doubt. The offsetting considerations to this risk tends to be factual track record, along with the litigious pressure a significant body of existing contract holders can apply to a carrier acting out of reasonability.
  
  No amount of class-action lawyering can beat a ripped-down securities account though.
  
  
  4) Comparing the EIUL to equities is inappropriate. Look at the Minnesota Life Balance sheet and you will see it's 87% fixed income.
  
  What the life companies use as their engine underneath the hood IS irrelevant for fixed & indexed strategies. They make their invested money however they choose to make their money, but they have to honor the fixed-formula of crediting they've contractually agreed to regardless their underlying performance mix.
  
  
  5) One should self insure for something they can afford to lose - much more cost-effective.
  
  Completely agreed.
  
  
  6) There are better ways to manage income and estate taxes than an EIUL or annuity.
  
  In some cases this is true, but not always (let alone the majority of time.) Again, no "blanket plan" is prudent to suggest or deny for anybody, and there are few strategies with the tax benefits and "market ratcheting" features of EIULs.
  
  
  One pattern I'm noting is that Brett and others compare this product to something really bad and it suddenly looks pretty good. Yes - An EIUL and annuities did better than a Madoff investment.
  
  This complaint is valid... but probably even more egregiously committed by commissioned securities hucksters (you have to agree.) The non-fiduciary sales people on both sides of the aisle can be misguided at best, sleazy at their worst... and if legislation and regulatory levels are any evidence of problem areas, securities is a far more dangerous arena for the general public.
  
  
  Finally, I'll give you 150% of the total S&P 500 return if you give me the unilateral right to change the terms. I'll bet you won't take me up on this $100K challenge.
  
  If you matched the floor protective guarantees, and the ratcheting market-reset features of EIUL policies, and you had a sufficient track record (20 - 100 years or longer) to observe your client treatment, you'd have a line-up at your door that would go for miles, my friend.
  
  I suspect you're not actually as well versed in all the features of the EIUL products as you may actually prefer to be... I would suggest digging in a bit deeper, and hopefully doing your best to remain unbiased.
  
  Tilt your lance at whole life, and variable products... and you have me on your wing every time. EIUL is a different animal than you are apparently used to.
  
  All the best!

•  
  49

  Allan Roth

  10/15/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Bosola,
  
  I appreciate your comment - I have over a thousand "drop dead" type emails from insurance agents and ones like yours mean a lot.

•  
  50

  Allan Roth

  10/15/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  AztecTheRed,
  
  First of all, I really appreciate your comments as I think this is good dialogue.
  
  1) Goldman Sachs did well because they sold a lot of derivatives and didn't hold any. Those that wanted the upside of the market without the downside risk are either extinct or we taxpayers own them.
  
  2) With three decades of corporate and personal financial planning, I can tell you that cash always matters. The crediting method determines the value that can ultimately be cashed out.
  
  3) I think we agree here - Insurance investments are far from the only abuse done to the consumer.
  
  4) How the insurance company makes money is always relevant, unless you believe that they, along with Las Vegas casinos, exist to give money out.
  
  5) We again agree that self-insurance for anything one can afford to lose is good. I suspect neither of us would pay $20 for an extended warranty of a $100 gadget.
  
  6) Yet another agreement - tax planning is complicated and there is no one solution. As a CPA, I'd be lying if I said I completely understood our tax code.
  
  7) You could be right that there is more consumer abuse in securities than in insurance. For what it's worth, I've written far more columns on securities abuse than insurance. For some reason, I have far more hate mail from insurance producers.
  
  8) Regarding your comment "Tilt your lance at whole life, and variable products," I've written far more columns on whole life and variable products. I assure you, I'm more hated on that side of the industry.
  
  Your comments are great - I appreciate them hope others can learn from where we agree and disagree.
  
  I'm happy to take a look at any product you have with your choice of it being private or want me to write about.
  
  I so want market returns with limited risk!

•  
  51

  AztecTheRed

  10/15/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi again Allen,
  
  Indeed, this is an enjoyable exchange.
  
  1) Goldman Sachs did well because they sold a lot of derivatives and didn't hold any. Those that wanted the upside of the market without the downside risk are either extinct or we taxpayers own them.
  
  Well, to be accurate GS was (is) a principal marketmaker in many markets... and as such they not only get a virtually risk-free 'slippage' on every trade match-off, they are able to use technology to front-run even momentary trends on a truly massive level. They definitely wrote a massive amount of derivative contracts... but the blade cuts both directions, and they wrote them long at the right times, and short at the right times (and hedged properly in all times.) Writing a derivative contract not previously purchased is, by definition, a "hold" unless/until it is bought to close, and the fattest profits in the derivatives game is those held to worthless expiry.
  
  
  The crediting method determines the value that can ultimately be cashed out.
  
  Uhhh... let's flip that around, actually. The contractual crediting method establishes the required minimum delivery on the contracts by the life company, and internally they must then perform sufficiently (if obscurely) to deliver on their contractual commitments PLUS (hopefully) additional internal profits to the company's bottom line. If internally they underperform, they do not get a "pass"... they must dip into their own reserves to keep their contractual crediting agreements, which are determined by an external independent barometer (literally arbitrarily, the nominated index.) They need not internally participate in that actual index at all... they merely need to perform sufficiently to deliver on their externally determined commitments.
  
  
  4) How the insurance company makes money is always relevant, unless you believe that they, along with Las Vegas casinos, exist to give money out.
  
  "HOW"? No. That they DO perform sufficiently, definitely yes. Again, their internal trading methods are irrelevant to their requirement to deliver to meet their defined credit calculation. As with some hedge funds, they COULD theoretically go lay it all on the ponies at Del Mar (though obviously they don't,) as long as come distribution day they deliver the pre-calculated funds to the cash accounts.
  
  
  I'm happy to take a look at any product you have with your choice of it being private or want me to write about.
  
  Take another look at the illustrations you already have from Brett... with open eyes in regards the actual risks. Although he may have come across a bit out of sorts, he actually covered many of the stated considerations accurately. The so-called "guaranteed" performance is poorly misnamed... it is actually a "worst-case" performance, which requires unreasonable increases in costs of insurance (the kind of actions that would have lawyers becoming extremely excited) as well as perpetual and consecutive index down years, one after another after another, PLUS a complete and stuborn refusal by the contract holder (in light of the armegeddon) to convert some of all of his cash account into the 5% fixed strategy.
  
  In other words.... the far more realistic (not optimistic... but actually realistic) illustration is the "non-guaranteed" performance, set with historically-tested averaged period returns.
  
  Try this for eyeglasses; Imagine that this strategy were offered on a no-load basis (Symmetra does this, by the way, on a constrained basis.) Remove the scatoma of commission conflicts... or imagine crediting all commissions to a client's fee account.
  
  NOW take another look at the details!
  
  Cheers, my friend.

•  
  52

  Allan Roth

  10/15/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  
  AztecTheRed,
  
  Your description of Goldman Sachs reads very much like the annual report of Lehman Brothers, just before bankruptcy. But this is getting a bit off the subject of this challenge.
  
  Having been financial officers of two muti-billion dollar insurance companies, I assure you we set benefits so that the premiums cover commissions, expenses, taxes, and profits. The contract has profitability priced in.
  
  Not only have I studied the illustrations Brett provided, the chief actuary of Minnesota Life agreed I could build my own policy with lower costs without their policy, as a pure investment and non insurance vehicle.
  
  I can't ignore commissions and other costs. One must examine how others make money from your investments and always remember that the only predictor of returns is cost. In investing, you get what you don't pay for.
  
  Thanks again for your comments.
  

•  
  53

  Allan Roth

  10/15/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  For a great inside story on insurance sales tactics, check out Kathy Kristof's great story:
  
  http://moneywatch.bnet.com/saving-money/blog/devil-details/inside-secrets-how-insurance-agents-get-you-to-buy/781/#comments

•  
  54

  Wealth Builder

  10/16/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Dear Mr. Roth,
  
  Your ongoing battle with the mighty insurance industry is eye opening and beyond my imagination. I would like to thank the MarketWatch for providing this platform for your wisdom.
  
  The fact that you've received over a thousand "drop dead" type emails is another solid endorsement of your "dare to be dull" and "dare to be courageous."
  
  Keep up with the good fight and don't let the bullies and snake oil salemen run you off the road.

•  
  55

  hikinganimal

  10/16/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Aztec the Red makes my point in a prior post. The worst case scenario of a guaranteed 2% or 3% return lasting 20 years before the IUL policy lapses is a highly unlikely event. The history of the S&P over the years has shown only a few times where the index went down successively for 2 or 3 year segments....but never 20 years. Were that to happen our entire economy would be a disaster.
  
  Also, the insurance company is investing in any number of areas not necessarily in the S&P. Their contractual obligation to the policy holder is to return X number of percent with a cap (say up to 12% or 14%) every year when the market is up. That contract must be met.
  
  I read the article by Kristof....I am sorry for the bad rap we insurance agents get. Some of it is deserved. I am trying to give a good product to a client that will help them, and I abhor slick sales people. Sales seminars are pretty much all the same. They are in all walks...not just insurance.
  
  And I appreciate this discourse...I have learned some things. If with your expert knowledge you can do better on your own....power to you.

•  
  56

  Allan Roth

  10/16/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikinganimal,
  
  Thanks for the comment. If the 20 year worst case scenario was a +2% to +3% annual return, then I would think the guarantee would give a 2% or 3% return, rather than a -3.2% IRR in the illustration. Don't forget the cost of insurance built into this product.
  
  I attended a seminar put on by the FPA that was titled something like "how to sell insurance products without getting sued." Not once was something uttered about putting the client's interests first. It was all about getting signatures.

•  
  57

  Allan Roth

  10/16/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Wealthbuilder,
  
  I appreciate the comment. I don't view myself as doing battle with the insurance industry as I'm an advocate of insurance for risk management. I look at cash value policies because I want to find one that will work for my family and my clients. I just haven't found one yet.
  
  I know the hate mail from producers is because I am impacting their income. I don't feel great about this but I do believe the consumer should come first.

•  
  58

  Brett A

  10/17/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  h

•  
  59

  Brett A

  10/17/09 | Report as spam

  The Challenge was Met

  It is humorous and ludicrous as those of you opposed to Indexed Life rant about it just because it is life insurance, or how options work and that they could not possibly provide these returns (after 11 years of doing so), or its alleged excessive costs. Or deflect attention away from the real issue by focusing on other irrelevant ones such as the likely need for long term care. When the fact is when all the dust settles - despite how you slice the pie for gains and costs - those of you who have invested in the market/stocks/mutual funds the past 20 years have a very small return (Dalbar reports it is 1.87% per yr), and for the past 10 yrs the Wall Street Journal reports it is about negative 35%. You all act oblivious to what has happened - especially over the past year - that has left retirement savings for millions in a world of hurt and loss. Yet despite the calls today for some kind of ?insurance? against market losses for retirement savings by voices such as TIME and the NY Times - which is exactly what Index Life provides - many of you insist it is some kind of snake oil fraud.
  
  Well, IUL has been around 11 yrs. now. The gains cap on one of the original plans is the same as when it started - in between it has only been higher. The companies have not lowered the caps to the gutter to steal the money. These companies have been in business hundreds of years - short changing clients is not their mentality. That is why they are the companies that survived and carried this country through the Depression and are the largest, strongest financial companies in the world today. They did not create the current financial crisis - the ?stock? companies and their products you praise & defend did that all on their own. But if you had put your money in an IUL the past 10 yrs. your $1 would be worth about $1.40 now instead of 65 cents (WSJ). So who got the last laugh!
  
  As for the strength of Minnesota, here is a listing of how it compares in the top 200 companies: http://www.keepandshare.com/doc/view.php?id=1462924&da=y . Here too is a Jim Cramer column where he talks about the financial strength of insurance companies -- for this reason he researched them for the strong companies (and products) and for his own life insurance he chose -- Minnesota Life: http://www.keepandshare.com/doc/view.php?id=1462925&da=y .
  
  You rant about the cost of the insurance as if funds did not have any costs. According to Morningstar the total management and transactions costs on the avg. fund are 3.03%, with small cap funds over 4%. Each yr forever as the balance (hopefully) grows. Do not forget opportunity costs. Whereas the TOTAL fees when the cash value is large -- including the insurance on a properly designed IUL -- could be 0.2% or less. Frankly I prefer the much lower costs of IUL -- I do not care what they are called. The other deflection is Roth keeps claiming a combination of Zero bonds and funds will outperform the market. I never said IUL would outperform other ?exotic? strategies (never a condition of the Challenge) or that you could not substitute the IUL for the ?fund? share if you like that strategy - if you did the result would likely be even more and without the downside market risk.
  
  This other red herring about ?insurable interest? is especially amusing! Who cares - if you can earn a net IRR of 8% with no downside market risk, and are allowed to buy it without it and can walk away with the money, you will! But I think you will find it very difficult to name anyone who does not have any insurable interest - at minimum it is the assurance that your own savings will not go down in value because of market losses. If that is not an ?insurable interest? I do not know what is. The cover story of TIME this week is ?The 401k Needs to be Retired?, and it states this is so because retirement savings are not insured against market loss. The CEO of Putnam said basically the same thing last week - ?retirement savings are not protected with index savings when the market crashes?. So you can listen to these other financial pundits who have a reputation to uphold with millions of people or not -- it is your retirement savings.
  
  Roth bludgeons me over LTC (I am right), but why will he not even address relevant side-topics such as the fact IUL income will not go into the formula to tax your Social Security? Or that future tax rate hikes will have NO effect on your gains and ?income?? Or the $1 million Accelerated Death Benefit a ?stock? investment cannot provide if you are diagnosed terminal? Or how about the positive benefit of the Life Insurance? Or that IUL is the best College Savings Plan? All these are included in the much lower costs vs. funds. These are real, direct benefits to address but he says not one word about them.
  
  Oh yes, for those of you worried about lapsing the policy if the ?market? collapses or because you greedily stripped out most of the cash, even if you are over age 100 the policy guarantees that it will stay in force until you die and so prevent a taxable event ever. Roth says he does not want to borrow out his own money - those are IRS rules for it to be Tax Free and most companies allow you to do this for a 0% net cost (or almost 0 like 0.1%. There is also a Variable option). If you want to actually withdraw the gains and pay taxes go ahead (your only choice with a MEC design).
  
  For those of you who believe the ?market? will earn less the next few years, one option of the IUL GUARANTEES it will credit your account with 140% of whatever gain there is up to 14%. That should more than offset any xtra costs (if any). Insurance companies have been doing this for years and they are not broke - they know what they are doing. (I explained all of this previously with using options, and provided links to actual illustrations). Believe it or not they actually make a profit running these large companies!
  
  So the ONLY thing Roth is left with is to focus on the absolute worst that could happen and so he says that makes this a lousy product. Or the fact I didn?t say the cap minimum is 3% (that sorta goes with saying the minimum lifetime guarantee is 3% but Roth does not want you to focus on the actual disclosure truth). That is disingenuous and just an excuse to avoid the facts about what really matters. The caps are a function in part of interest rates and so the budget for options. Those are at historical lows and the companies have not dropped the caps to the minimum - not even close. And why would they - you can walk with the money if they do and put it in another plan - they do not want that to happen - or keep it.
  
  If you put these side-by-side I wonder which plan his wife would pick? I will not leave you guessing - they always pick the IUL. So do the husbands. That is why there will be over $1 Billion in new 1st year premium this year. At $10,000 per policy avg. that = 100,000+ new people who like these IUL benefits! Why do not large institutions offer this if it is so good? You have to be an insurance co. Or own one. Or have a partnership that allows them to make a profit. Mostly I think it is because they still have not heard about it or understand what it does and how it works. That is part of my reason for having done this - I may of lost this sham ?Challenge? but hopefully it has left many more of you educated at least to the fact you have another investing option that is worth your education and consideration.
  
  As for the Challenge, Roth has never said I did not meet the condition of showing how you could earn 8% in 10 years with ?limited downside risk?. But you can never win a challenge when one of the players is also the only person making up the rules and can change them whenever they like, and is also the only referee with a vote to decide if he was right or not. It is kinda like saying you can race a horse around the track in less than a minute. It does not matter what the horse cost or what the mortgage is on the owners house or costs to feed or what color it is - just what is the net time across the line. When you do it the ref then says, ?My horse can do it in 58 seconds instead of 59, and I meant while you were riding backwards.? When you do that too he says, ?I meant backwards and blindfolded on a muddy track during pouring rain every day for 10 days.? At some point you realize the challenge is a FRAUD and move on.
  
  All these other conditions were only added AFTER the challenge was met - the excuses for reneging on it are that the 8% is not guaranteed; the company can lower the caps; S&P dividends are not included; something else will earn more or do it better or cheaper; each couple age 65 (he says) will never have to pay for long term care, etc. The excuses go on and on, but the bottom line is based on current and historical S&P gains and policy costs for decades, Indexed Life met his challenge. That something else could do it also or better was NOT a condition. NONE of these other things were.
  
  I challenge Roth to show where even one of them are included in the Challenge terms. Or that based on historical S&P gains (without dividends) and historical IUL caps and participation rates the average net would not be 8% or more. He cannot. The average 10 year return of the S&P 500 for the past 45 years would result in the Minnesota IUL having a net return of 8% or more. Is that not what really matters? Is that not what the Challenge was? The loser in this was Roths integrity and those of you he convinced with his deflections to not consider Indexed Life for part of your financial plans. The rest of us will be laughing all the way ?to the bank? through retirement!
  
  Brett Anderson

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  60

  Allan Roth

  10/17/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  Here are a couple of things I want to point out:
  
  1) You continue to recommend a product offered by Minnesota Life where their chief actuary noted there were better products for those without an insurable need. You stated an insurable need "is not a factor in choosing to invest money in this product - it is incidental." Minnesota Life and I disagree as it is a significant part of the cost the consumer pays for.
  
  2) You noted in comment #23 "I am busy with investors and advisors who want my help and I don?t have time to keep answering the same questions." Yet you have time for a 13 paragraph post attacking my integrity.
  
  I did not think you met the challenge that in your words were as follows:
  
  "I can blow away saving for retirement in any market fund, with an Indexed Life policy. How about a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk."
  
  I do very much appreciate you putting me in touch with Benjamin Roth at Minnesota Life.

•  
  61

  roccycwpp

  10/18/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Interesting title for this blog and interesting comments.
  
  First, it is clear that Mr. Roth's heart is in the right place. Protecting the consumer by giving them information is always a good thing.
  
  However, it is clear that Mr. Roth does not understand Equity Indexed Life Insurance policies.
  
  If you want to run a proper example comparing EIUL to other wealth building tools, you have to build a fair example. Any example of using EIUL must start with the fact the premium must be paid in over a five-seven year period. Mr. Roth is correct that if you paid the premium all in one year the policy would either become a MEC or the costs in the policy with the required death benefit would be so high that the finances of using the policy simply would not work.
  
  Assuming you ran a fair comparison to let's say mutual funds, then you have to take into account the real costs of the mutual funds as well as short term and long term capital gains taxes (not to mention that there is no protection from downside risk when you use mutual funds (unlike when you use an EIUL).
  
  One of the other problems with Mr. Roth's discussion is that he used the MN life product. It is not the best product in the market (or even close if you want to run "conservative" illustrations).
  
  Without boring everyone to tears on this site with the exact math explaining why using EIUL should work well as a wealth builder for millions of Americans (who all wish they had their money in such policies over the last 10 years), I'll simply refer everyone to my new book where I have the math supporting such a conclusion.
  
  If you are interested in verifiable math that will tell you how well and EIUL policy can work to grow your wealth, simply go to www.retiringwithoutrisk.com.
  
  To the extent anyone wants to debate the numbers in my book, I?d be happy to engage in such a debate in a blog or in other media format.
  
  Roccy DeFrancesco, JD
  Founder, The Wealth Preservation Institute
  

•  
  62

  Dylan R

  10/18/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  The debate about whether the challenge was met is becoming
  humorous and ludicrous. The challenge was to convince Allan Roth
  that there is a life insurance product worthy of investing in. Brett
  clearly didn't do that. If the task is to convince the challenger, who
  else should be defining what does and does not convince him? You
  either convince him or you don't.
  
  The claim I continually see and hear from insurance agents is that
  these are good products, and maybe some of them are. The
  supporting evidence is often comparison to things/numbers that are
  not as good. But if I do not invest in mutual funds with industry
  average expenses, or if I invest in other parts of the market, such
  comparisons are meaningless. I am more concerned with how it
  compares to the lowest cost, diversified, alternatives available to
  me. I do not care that you can beat out the stuff that I too can
  beat out.
  
  I am not (and I suspect neither is Allan Roth) simply looking for
  good investments that work well at building wealth if I can
  readily access something better, more efficient, more appropriate,
  lower costs, etc.

•  
  63

  Allan Roth

  10/18/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Dylan R,
  
  You are, of course, correct. If you compare something bad to something worse, the bad looks good by comparison.

•  
  64

  AztecTheRed

  10/18/09 | Report as spam

  What can actually perform better, longterm?

  Hi Allan,
  Let's take a look then at what you can propose as POSSIBLE superior alternatives. The enumerated advantages held in combination by EIUL strategies are;
  
  A) Never loses principal, protective floor of 0% if the indexed market drops, regardless of market timing,
  B) Indexed Gains match a given index up to a ceiling/cap (15% is an example,)
  C) Fixed Gains can be chosen (and subsequently unchosen) to give a guaranteed 5% credit in any period the owner doubts the indexed market will beat 5%,
  D) Gains once booked are converted to principal, which is again never at risk of market loss,
  E) Gains are technically tax-deferred... however the IRS has zero demands for required taxable distributions, so they in effect may remain permanently untaxed,
  F) Gains (and principal) may be accessed tax-free for any purpose incrementally up to typically year 10, and without restriction thereafter, via zero net interest policy loans (which have no repayment stipulations during the policy-owners lifetime,)
  G) Gains and principal, whenever taken for consumption by the owner receiving SS benefits, have no income taxation trigger on Social Security benefits,
  H) Gains and principal held in EIUL strategies have no adverse effects on a college student's qualifications for grants, aid, subsidies, scholarships, nor deferred-interest student loans,
  I) EIUL balances are not required to be spent-down in order to take advantage of senior healthcare benefits,
  J) Gains, historically calculated among the 'worst-case' sequential market periods over 30 years, have performed north of 8% net of all policy costs & fees, with zero down years.
  K) The fee burden on EIUL managed funds, on a 10+ year basis, including costs of insurance (for standard non-smokers,) is much less than the fee burden for typical actively-managed accounts,
  
  
  For challenge purposes, you can even ignore all but A, D, E, F, and J.
  A) Principal never lost,
  D) Gains never lost,
  E,F) Tax-free
  J) 8%+ net/net
  
  In the SHORT-run, for those who don't mind the risk, there are plenty of actively managed alternatives...
  
  For the LONG-run, when timing of access is unknown, can you propose anything for someone wanting superior performance without market timing risks in a tax-free environment?
  
  What would that be?
  
  Sincerely,
  Aztec

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  65

  Allan Roth

  10/18/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Aztec,
  
  No - and that's the point. There is no product I know of that gives an expected 8% return without risk. The illustration provided by Brett did not guarantee all principal - it had a loss in 10 years while a 60% stock index/ 40% bond index portfolio had a substantial gain. At 26 years, it had a zero guaranteed value.
  
  I'd build my own annuity by buying a zero coupon bond and stock index funds. By putting the bond in my IRA and equities in my taxable account, I get a much more tax-efficient portfolio than borrowing my own money against a policy and risking a tax catastrophe if the policy lapses.
  
  As noted, Minnesota Life stated they use a similar strategy so why not avoid the commissions, costs, taxes, and insurance company profits?
  
  Understanding how the insurance company makes money is key. Insurance companies are great for insurance needs.
  
  I so want to believe I can earn 8% without risk for my family but I've so far never found this solution.
  
  Thanks for the comments.

•  
  66

  roccycwpp

  10/19/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Yes, I?d say this is a bit comical.
  
  It seems that everyone is trying to flex their muscles when it comes to their knowledge and trying to make the point that their way of doing things is the "right" way.
  
  The fact of the matter is that proper planning involves diversification.
  
  There is nothing wrong per se with stocks or mutual funds. Many client should have them as part of a long term diversified portfolio (long term because the short term risks can be great (just ask anyone over 65 who was counseled into a "diversified" portfolio and who lost over 50% of that in the recent stock market downturn)).
  
  There is nothing wrong with a properly designed life policy as wealth building tool (EIUL specifically) (Although EIUL will not work too well for anyone over 60 due to the cost of insurance).
  
  As I've stated, I?ve written a book on the benefits of using EIUL as a tool for wealth building and I have a very sophisticated software program that will compare building wealth to mutual funds (using any variables you want) and to tax deferred plans such as 401(k) plans. When thinking about writing the book I had to run ?real world? illustrations to determine for myself if EIUL is a valuable tool. The numbers turned out to be very positive and so I move forward to write the book.
  
  I'd be happy to continue this debate, but let's start having a debate with real world variables/numbers instead of all the pontification that's going on.
  
  Let's try another debate that I think would end up being comical. FIA with guaranteed income rider. If Mr. Roth is consistent he'll say there is no place for these products either.

•  
  67

  Allan Roth

  10/19/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  roccycwpp,
  
  You state:
  
  "If Mr. Roth is consistent he'll say there is no place for these products either."
  
  I'll be happy to look at any numbers on any policy you'd like to propose. That is my consistent stance.
  
  I'll be happy to look at your FIA "variables/numbers" as I did with the illustrations provided with this challenge.

•  
  68

  DougDiggerEberhardt

  10/19/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett A. said;
  
  "So the ONLY thing Roth is left with is to focus on the absolute worst that could happen."
  
  One other "worst"thing that could happen is the rules are changed.
  
  In full disclosure to a prospect it needs (IMO) to be pointed out that the IRS at some point in the future could start to tax these types of products just like they changed the tax structure of them 20 or so years ago going from a FIFO basis to a LIFO basis for withdrawals. Granted this could be a good selling point too..., that if the IRS is looking at them, they know they might be too good for us consumers....but who would win out when push comes to shove? Hardly ever the consumer.
  
  If you look at the state of the nation and the bills it currently has to pay as well as future obligations for the now inducted members of the baby boomer generation into the social security system and add to that proposed health care programs, state induced global warming cures, cap and trade, cash for clunkers and free money for houses, etc. etc., one would have to conclude we're on a slippery slope.
  
  Insurance companies might be a target (despite the large lobby that curtails such efforts by congress).
  
  Case in point, H.B. 2854 in Oregon: http://www.acli.com/ACLI/Newsroom/News+Releases/NR09-021.htm
  
  "?Oregonians who purchase life insurance and annuity products to assure the financial security of themselves and their loved ones would be hit with a tax that undermines their carefully-made financial protection, long-term savings and retirement income. H.B. 2854 would impose a tax on the life insurance benefits received by Oregon families suffering the death of a loved one. It would also impose a new tax on savings through life insurance and annuities."
  
  Oregon, like many other states, are talking about ways to find funds to pay their bills because of the current unemployment picture. God knows (like most other struggling states) they don't want to cut departments or salaries.
  
  Obama is definitely looking at the insurance industry (among other places):
  
  Insurers May Be Victims of Obama's Crackdown on Tax Havens
  
  http://industry.bnet.com/financial-services/10001091/insurers-may-be-victims-of-obamas-crackdown-on-tax-havens/
  
  Obama tax proposal would hit securities dealers, life insurance firms, big estates
  
  http://articles.latimes.com/2009/may/12/business/fi-taxes12
  
  I'm not saying it will happen, but as shown above, when push comes to shove, the vampire state will look for blood where it can find it. That you can "bank" on!
  
  Call me negative, sure....and I realize it's not just insurance companies that would be affected. When government gets too big, the crack of the whip will be painful for most. It's just hard for me to give up control for too long a time-frame when I know Obama has the whip in hand and isn't afraid to use it (and same goes for Bush and any Republican who voted for TARP, etc etc.). Things can change on a dime as shown in the last twelve months.
  
  I would fit in Aztec's short run scenario. His and Brett's long run scenario might fit others. I just wanted to add another potential "worst case" scenario that one might think is important....or not (if you trust government to be in your best interest and not theirs), based on the facts I've laid out.
  
  Enjoyed hearing all sides... I unfortunately don't see it all black and white, but the insurance industry does have a track record to point to. And so does the cannibalistic and hungry leviathan that controls its (and its products) future.
  
  And I will repeat....a prospect will buy what you put in front of them because they like you. Most don't know what the hell you're talking about and never go into such detail as Allan's article and comments. Brett may never convince Allan to fork over $100k, but I'd guess he convinces most he speaks with because he believes in it.
  
  

•  
  69

  Allan Roth

  10/19/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  DougDiggerEberhardt,
  
  The fact that the sales folks believe in these products was a key learning for me, several years ago. I once thought that annuity sales folks were just tricking the elderly to make money. To date, however, I have never met an insurance producer who didn't truly believe in what they were selling.
  
  Many believe it it so strongly that they think it justifies making inaccurate statements like the S&P 500 INDEX is the same as the total market return.
  
  Never underestimate someones ability to not understand something if their income is dependent on them not understanding it.

•  
  70

  Brett A

  10/19/09 | Report as spam

  Worst Case Fabrications

  
  Roth is doing it again - only giving you half-truths to reach the answer he wants, so I have no choice but to respond.
  
  With the IUL plan for him, IF the S&P 500 had ZERO gains for 26 years AND IF the co. raised the internal expenses to the max. allowed (in 128 years they have NEVER raised them at all for an issued policy) then -- if you were so intellectually challenged you left the money here the whole time -- the cash value in year 26 would go to zero. If you did the same with a mutual fund, with maximum fees it would go to zero cash value even quicker.
  
  These are the historical gains of the S&P (not including dividends or deducting fees) since WWII:
  Average 10 year gain: 8.44%
  Average 20 year gain: 7.93%
  Average 30 year gain: 7.47%
  
  If we did this for the years before these they would look much the same. It is fair to say the likelihood of the gains being zero for 26 years in a row are ZERO. If they are then the world is experiencing much bigger problems and this is irrelevant. But this is the basis Roth is using to say IUL did not meet the challenge because the 8% is not guaranteed. It is a bit like wanting a guarantee that if a nuclear bomb goes off the house will still be standing AND going up in value.
  
  But the IUL will keep going up in value! If the S&P had zero gains for 26 years AND at CURRENT policy expenses AND the current minimum guaranty of 3%, then in year 26 this policy would have a guaranteed cash surrender value of $161,473 -- NOT $0. The next yr it is $165,177 -- it will always be going up! But Roth wants you to believe the realistic minimum gtd. value is actually zero, because this is the ONLY way he validates his decision.
  
  Based on the historical gains of the S&P, the average IRR in year 10 for the MEC design is 7.49%. This illustration was posted before for you to look at (http://www.keepandshare.com/doc/view.php?id=1452589&da=y). If you also factor in historical interest rates (currently historical lows) and the global index option and 140% Participation Rate option, the net IRR in year 10 is more realistically 8% to almost 10%. Each year as you earn index gains they are locked into the guaranteed principal - when the market does go down the value of the IUL account does NOT go down too because of these losses, and it does not mysteriously revert to the values of the 3% minimum gty. and maximum expenses that Roth wants you to believe goes to $0 in year 26. Nothing could be farther from the truth. But he does not want you to understand that.
  
  Roth also has the option of doing the IUL that will have the tax free distribution feature, but he told me all that matters for the Challenge is the maximum likely IRR in year 10. So then basing his decision on an absolute worse, totally unrealistic scenario to have a $0 value in year 26 is completely disingenuous. Based on historical S&P index gains the account value will more realistically be worth over $200,000 in year 10. That is done with minimal risk -- i.e., he keeps ALL the gains as earned (less annual expenses as with any other investment) each year. That was the only original condition. Then he added 8% net fees. Then he added 10 years. When those were met he added all these other conditions.
  
  As for the insurance and other costs, the average annual cost over the 26 years is 0.036%. The total cost in yr 20 is 0.016%. Whereas the avg. mutual fund is 3.03% (min.). So much for these awful insurance expenses (and so an insurable need to justify them) -- show me any other investment with such a low total cost factor!
  
  As for the government changing the distribution tax rules on life insurance plans, they can. They did in the 80?s. But the Supreme Court has ruled the changes would ONLY apply to NEW policies. If you obtain an IUL plan before any changes (if ever) are made, you lock in the current Tax Free income/loan benefits. This worst case scenario does not factor into the current situation.
  
  I challenge Roth to show in any column or email that any of these other worst case minimum guarantee scenarios were a condition to the challenge. Show where 8% guaranteed was a condition. Provide the condition it had to outperform all other investment strategies (and they have market loss risk). I challenge him to also show where the risk of long term care was a condition. He cannot. I challenge any of you other naysayers to show us a way to earn 8% NET consistently over multiple periods of time. With NO market risk (account cannot do down in value because of market losses GUARANTEED). You cannot do it even with market risk. The equivalent Qualified Plan pre-tax gain you need to show with a 35% MTR = 12.35% net fees.
  
  As for impinging his integrity, it was he who attacked mine in his initial challenge decision comments, saying nothing I had to say was believable because I could not support the - (his word) - ridiculous statement about LTC need. Then he sent me an email that said his comments were nothing personal. Well Allan -- nothing personal. Using facts from the U.S. Government I showed the LTC statement is correct. I have provided fact upon fact with links to the source. Roth has not provided a single one - not a single chart or reference or link. Nothing. He says he does not like Indexed Life because if the S&P earns zero for 26 years and the company increases the costs, it will be worth zero in that year. If he is dumb enough to keep it or anything else that long if that is what happens. On that basis none of us should make any market related investments ever. We certainly would not want to base decisions on using real historical gains and costs for a realistic IRR projection!
  

•  
  71

  Allan Roth

  10/19/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  For someone who claims you don't have time to participate any further in this discussion, you sure write long posts.
  
  Could you take five seconds and just answer the question i've asked a few times:
  
  Do you dispute that Minnesota Life does not recommend this product for someone that does not have an insurable need?
  
  A "yes" or "no" would be fine.
  
  Thanks.

•  
  72

  Brett A

  10/19/09 | Report as spam

  Insurable Interest

  Alan - I have to keep responding and at length because of the omissions and 1/2 truths you insist on continuing to write even after presented with 3rd party evidence your statements are not true. Why do you ignore and not address the other real benefits and features of Indexed Life - why only the absolute worst scenarios that have a probability of 0%?
  
  With an avg. expense ratio over 26 years (your #) of 0.036% per year including ALL the insurance costs and a net IRR of over 8% net of fees with a guarantee you keep all your annual gains, do you really need to have a classic insurable need? Would the answer change your decision?

•  
  73

  DougDiggerEberhardt

  10/19/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  You answered my worse case scenario question to my satisfaction. I do remember (it's been a few years) that they did grandfather the FIFO folks in when they changed the rules.
  
  Unfortunately (or not?) I have another worse case scenario which is more relevant and possibly not even a worst case issue.
  
  These policies that the client has taken income from (tax free loans) to the tune of hundred's of thousands of dollars by age 80, and then dies (best case scenario), would possibly have estate taxes to pay would they not? To the tune of 45% - 55% depending on the estate value?
  
  This is because as the tax code stands today, starting in 2011, the maximum that one can pass to heirs estate tax free is $1,000,000.
  
  Naturally most of the people you sell these types of policies to would buy them as a compliment to their IRA's, 401k's and house as part of their complete retirement portfolio. Retiring on a million today may or may not cover your liquid retirement needs. Your policy would be an added place where people could choose to withdraw money from tax free "if they are the owner of that policy" at age 65 as you illustrate.
  
  However, come age 80 or so, just a few years past mortality, the amount withdrawn is subtracted from the death benefit if they die correct? This means, if I'm not mistaken, that you have a larger death benefit ($1.2 million in your example) at age 80 because the loan is included in the death benefit for estate tax purposes at death.
  
  When the client passes away, the policy would be added to the estate and become subject to estate taxes along with the house, IRA and 401k.
  
  So yes, they get the money tax free during their retirement years, but the estate taxes would negate that "if" the person had an estate taxable estate above the $1 Million threshold in 2011 and beyond.
  
  Since I've been out of touch with the business a few years, I don't remember the rules, so I submit this post as a query, not an absolute.
  
  My understanding is that if the insured has insurable interest (owner and/or access to cash value) then it is included in their estate and thus subject to possible estate taxes.
  
  It is the death benefit alone that could cause all other assets in the clients estate to be estate taxed if the 2011 taxable level is maintained at $1 Million by the tax hungry Obama administration. As the Baby Boomers start dropping off, it's an easy place for the state to attack. It's another issue that I/we have no control over. Just speculation as to what "may" occur.
  
  An ILIT (Irrevocable Life Insurance Trust) wouldn't work as the insured couldn't take income from it.
  
  Although I agree there may be ways that the one's who can afford Private Letter Rulings might be able to accomplish this, that's not what the average Joe I believe we're speaking of here would do.
  
  I think I've said enough...just looking to see how you can have your cake and eat it too... That and I love to play devil's advocate...but always willing to learn that for which I do not know...
  
  Doug
  
  

•  
  74

  Brett A

  10/19/09 | Report as spam

  Estate Taxes

  Doug - as you know the Estate Tax issue is still up in the air. Here is what 2 sources report about it:
  
  Under tax cut legislation passed by Congress under President George W. Bush, the estate tax has been steadily shrinking and is scheduled to be repealed in 2010. If current law remains in place, it would then return full-strength, with a 55% rate and $1 million exemption level, in 2011. President Obama has proposed making permanent the 2009 estate tax rules beginning next year. Those rules tax estate wealth in excess of $3.5 million, or $7 million for married couples, at 45%.
  http://online.wsj.com/article/BT-CO-20090929-715377.html
  
  The Tax Policy Center estimates that if the 2009 estate tax is made permanent, only 6,410 - or one-quarter of 1 percent - of all estates will be subject to tax in 2011. If Congress does nothing and the estate tax reverts to the pre-2001 law, the center estimates that about 46,000 estates - or 2 percent of the total - will be subject to tax in 2011.
  http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/04/25/BUGE178HU6.DTL
  
  First, this problem is not mutually exclusive to having an Indexed Life plan so not an issue directly relevant to the other issues above - you'd have the tax to pay regardless. As you can see a very small % of people are subject to it, and this is not my area of sophisticated expertise. We are talking about two different kinds of needs and so a need for two different plans. If you know your estate is going to be subject to an estate tax after all other avenues to reduce it have been taken, then the short answer and best simple solution is to have a 2nd life policy in an ILIT to pay those taxes. You could possibly gift the income from the IUL to pay the ILIT premiums. A 2nd-to-die and/or other type may be better for the ILIT depending on the scenario and policy parameters required by the attorney.

•  
  75

  Allan Roth

  10/19/09 | Report as spam

  Repeating the question to Brett

  Could you take five seconds and just answer the question i've asked a few times:
  
  Do you dispute that Minnesota Life does not recommend this product for someone that does not have an insurable need?
  
  A "yes" or "no" would be fine.
  
  In response to your question - I use the guaranteed values that YOU PROVIDED as the "NO downside risk" you used in your challenge. Those value are the minimum that Minnesota Life is contractually obligated to pay.
  
  I agree that a mutual fund strategy with a 3% expense ratio is flawed and have written far more on this subject than others.
  
  This is not the first time I haven't been able to convince a producer that there are better investments outside an insurance wrapper.
  
  What IS a first for me is the following:
  
  This is the first time I've ever had an insurance producer continue to push a product its chief actuary recommends against for those like me without an insurable need.
  
  I'm not the Insurance regulator but I hope you are disclosing to clients that Minnesota Life does not recommend this product as a investment, without an insurable need.

•  
  76

  AztecTheRed

  10/19/09 | Report as spam

  A deeper look at Reset-Indexing versus Zero Coupon plus index securities

  Some interesting academia around this thread's topic. Not regarding the life chassis design, but the annuity side.
  
  http://fic.wharton.upenn.edu/fic/Policy%20page/RealWorldReturns.pdf
  
  Often a financial columnist or an occasional other writer will dismiss the index annuity concept
  by proposing that a consumer purchase a long-term zero-coupon bond together with an index
  fund instead of an index annuity (Clements, 2005; Pressman, 2007; Warner, 2005; McCann and
  Luo, 2006). These columnists and other writers often posit the term end point crediting method
  as the representative interest crediting structure. However, all term end point designs account for
  less than 4.5% of sales over the last four years and term end point design using two crediting
  components represents even less (Marrion, 2006, 2007; Moore, 2008, 2009). Indeed, Collins,
  Lam and Stampfli (2009) base their conclusions on a term end point that uses a cap, but less than
  1% of the products have ever placed a cap on a term end point crediting method (Marrion, 2009).
  Such a product is certainly not representative of index annuity crediting methods in practice.
  
  More at the paper linked... a worthy read, I think.
  http://fic.wharton.upenn.edu/fic/Policy%20page/RealWorldReturns.pdf
  

•  
  77

  Allan Roth

  10/19/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  AztecTheRed
  
  I've had a conversation with one of the Wharton professors, though not one who did this study.
  
  I don't agree that the long-term zero coupon bond and index fund only has an end-point application since both have market values throughout the period.
  
  I have recently interviewed another academic on his paper making the case for annuities. I'll write about this at some point but I think I've written enough lately on investing through insurance products.
  
  I continue to appreiceate your comments.

•  
  78

  DougDiggerEberhardt

  10/20/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett wrote:
  
  "If Congress does nothing and the estate tax reverts to the pre-2001 law, the center estimates that about 46,000 estates - or 2 percent of the total - will be subject to tax in 2011." (via Tax Policy Institute)
  
  Brett,
  
  My point for bringing this up is that in your example for the 52 year old and anyone else near this age, by age 80 they would have close to this $1 million threshold (accumulated or withdrawn) if the illustrations averages what was proposed.
  
  This in turn would add to the 46,000 estates virtually everyone invested in this product in that age bracket as the $800,000 to $1.2 million would be added to the individual's house, 401k, IRA, etc. Numbers of course will vary by age and return.
  
  Am I missing something?
  
  Allan, I don't think anyone at Minnesota Life, or its agents, would recommend someone purposefully make one of these contracts a taxable MEC to begin with.
  
  Maximum funding under IRC 7702 guidelines would however be something they would recommend.
  
  It's rather easy to portray insurable interest of an individual for the underwriters (the difference between cash value illustrated and the death benefit), especially if they have a spouse with income needs, younger children, potential estate tax issues (although this isn't the product for it, it can be a listed "need"), and/or even income needs to supplement retirement by the insured turning the cash value into a lifetime income settlement option (not my recommendation, but all we're doing here is fooling the underwriter right? Not that any reputable agent would do that of course....).
  
  Just playing devil's advocate on both sides....
  
  
  
  
  
  

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  79

  roccycwpp

  10/20/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Let me answer the question on insurable interest.
  
  Allan, this is a good illustration that you do not understand the insurance industry.
  
  If you call an insurance company and ask them if they will allow a product to be sold to someone without an insurable interest, 100% of the time they will say no. There are laws dealing with insurable interest they must comply with (which have been massively violated lately with SOLI/STOLI sales).
  
  Having said that, your question is one no advisor who understands insurance would ask of an insurance company.
  
  Why? Because every client you sell a policy on their life where the beneficiary is a loved one, a trust for the benefit of, or a charity HAS an insurable interest.
  
  It's a question where the answer is nearly always yes and goes without saying.
  
  If you ask MN life or any company that sells a cash value life insurance policy designed to build cash if it is ok to sell the policy to someone who is more interested in building cash and tax free income (loans) than the death benefit, the answer 100% of the time will be yes (because insurable interest is not an issue).
  
  So, this debate while useless to anyone who understands insurance, may prove to be useful to you Allan and anyone who does not understand the laws and regulations dealing with used cash value life insurance as a wealth building tool.
  
  I suggest you move off of the argument that CVL shouldn't be used because you asked the wrong question to the home office at MN life and instead focus on the numbers of whether using a life insurance policy makes financial sense as a wealth building tool.
  
  Roccy

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  80

  Allan Roth

  10/20/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  roccycwpp
  
  If you had read the blog, you would know that my past includes being financial officers of two multi-billion dollar insurance companies.
  
  The economics work as follows - Insurance company takes consumer's premiums, pay commissions, taxes, costs, and profits, and then invest the rest in fixed income and equities that the consumer could have bought directly. What's left, goes back to the consumer. I choose to disintermediate the insurance company and commission to the producer. I do not use the 3% fee mutual funds written about by producers in these comments. I use ultra low cost funds.
  
  There is no law that forced Minnesota Life to tell me they would not recommend this product for those without an insurable need. I think they they said this to be accurate. There is also no law that forced Minnesota Life to say they use a similar strategy as the zero coupon bond & low cost equity index funds strategy.
  
  Minnesota Life has differentiated themselves from other companies, in my book!

•  
  81

  Allan Roth

  10/20/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  DougDiggerEberhardt,
  
  Great comments - tax laws and logic do not go together. As a CPA, I've outsmarted myself many times. I don't predict what the stock market will do tomorrow and I don't predict what Congress will do ever.
  
  The fourth dimension of diversification is what I call tax-diversification from what Congress may eventually do to us. I wrote about it in the following:
  
  http://moneywatch.bnet.com/investing/blog/irrational-investor/roth-on-roth-iras-and-401ks/500/?tag=col1;blog-river
  
  The MEC was recommended by Brett, the insurance producer. The difference between the cash value and death benefit is the insurance value - not an insurable need.
  
  Thanks for continued great comments.

•  
  82

  Allan Roth

  10/20/09 | Report as spam

  The Lost Decade of Stock Investing

  Brett A wrote:
  
  "If you invested $100 in the S&P 500 at the end of the last decade, you're happy with Dow 10000 but still hoping for a 34.5% rally before year end -- just to break even. You'll need a staggering 72% rally when adjusting for inflation."
  
  http://online.wsj.com/article/SB125556534569686215.html
  
  I spoke to the author of this Wall Street Journal article and here is what I found:
  
  http://moneywatch.bnet.com/investing/blog/irrational-investor/fact-check-even-the-wall-street-journal-perpetuates-investing-myth/677/?tag=col1;blog-river
  

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  83

  Brett A

  10/20/09 | Report as spam

  Insurable Interest

  Let us assume for the sake of argument that the actuary with all the companies state you must have an insurable interest to purchase a policy - legally it is required. For some reason you are insisting that the only definition of an insurable interest is a dependent that would need the proceeds of a policy to sustain their life. It would seem too that your only planning horizon is how much profit is there at the end of the year. I look at it from a lifetime perspective, and my education and decades of work experience is to look at features, benefits and solutions from every perspective possible.
  
  Just like with the 3% minimum (if the S&P does nothing for 26 years) and maximum cost decoy, you are pounding away at another false argument in that 99% of the time there will be a classic insurable interest of a spouse, child, parent, other family member or even charity that each of us wants to protect. But what about the 1% (or less) who have absolutely no insurable interest except themselves. Is not guaranteeing you can preserve your savings from market loss a valid interest? Or that you can eliminate all future increased tax rate risk on the gains you take out? And by being able to take out those gains tax free? How about reducing the tax on our Social Security because the gains/income accessed as loans are exempt from the tax formula? Is there any one of us who would not want to be able to receive up to $1 million today if we are diagnosed terminal, to use it to save our life or pay the bills until the end? How about being able to access your savings before retirement to finance your life (the Own Banker strategy not possible or major restrictions with most other investments or Qualified Plans)?
  
  You would be very hard pressed to find someone without any financial interest that would not be enhanced with an Indexed Life plan. But to get a plan you do need to list a beneficiary. Would you deny yourself these benefits and self insurable interests because you did not have a typical beneficiary / insurable interest? I think not. Even so, can you find even one person who does not have someone (or an organization) they would not want to receive there estate proceeds (with life insurance or not)?
  
  This is the legal definition of insurable interest:
  
  (quote) A person is always considered to have an unlimited insurable interest in his own life and health. Therefore, the beneficiaries of the policies that an insured purchases on his own life do not need to have an insurable interest. It is presumed that the insured would name as a beneficiary only people who want the insured to live a long and healthy life. A person, therefore, can obtain as much insurance as he wishes on himself - subject to other limits an insurance company might have. For example, insurance companies commonly limit the amount of insurance they will place on a person to that appropriate to his income and life style. http://law.freeadvice.com/insurance_law/life_insurance_law/insurable-interest-life-insurance.htm
  
  Your argument about insurable interest is just another red herring to divert attention from the real merits of IUL for the Challenge. How many other false and illusory excuses do you have to justify your failing to agree that the minimal market risk and realistic potential gains based on historical returns of the past several decades, meets all the original conditions of your challenge? And do not even start that something else could do it as well or better - even if it can that was NOT a condition of the challenge. Show me anything we agreed to that says it or any of these other things are. We both know you cannot.
  
  

•  
  84

  Allan Roth

  10/20/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  
  You neglected to mention the definition you used came from an insurance article?
  
  If I buy a $100 GPS, I could insure it for $20 or so with an extended warranty. I chose to self insure because it will cost me less in the long-run. Same goes for life insurance as insurance companies are in business to make money - even mutually owned companies.
  
  I"ll ask for the 5th time:
  
  Do you dispute that Minnesota Life does not recommend this product for someone that does not have an insurable need?
  
  A "yes" or "no" would be fine.
  
  I'll keep asking.

•  
  85

  Brett A

  10/20/09 | Report as spam

  Need

  Allan, Allan, Allan. Everyone has an insurable need - the insurable interest in their own health and financial well being is legally unlimited as a basis for owning a policy. So the situation you insist on does not exist. Why do you keep from refusing to answer the question: will the answer of Minnesota or any company make any difference in your decision?
  
  What will you do without something not related to the merits of IUL to harp on and deflect away from the real issue, which is how it can really perform and benefit anyone for a variety of personal and financial needs?!

•  
  86

  Allan Roth

  10/20/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  So to document your beliefs:
  
  1) No one should self insure - very different than your comment - an insurable need "is not a factor in choosing to invest money in this product - it is incidental."
  
  2) A zero guaranteed value in your illustration equates to "NO downside market risk."
  
  3) No couple has any chance of dying without one first going to a nursing home for at least 2.5 years ?The odds of a couple age 65 eventually needing to pay for one typical Nursing Home stay for 2 1/2 years, is 100%!?
  
  4) You state you don't have time to participate in this forum discussion yet you:
  
  A) Keep posting
  B) Won't answer one simple question I keep asking.
  
  Your logic uses a different set of rules. In your world of logic, maybe Las Vegas casinos and insurance companies do exist to make consumers rich.

•  
  87

  roccycwpp

  10/21/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Allan,
  
  I had to laugh when I saw your comment that you were a CFO at two billion dollar insurance companies. That does not qualify you to have this debate. Most of the home office at these insurance companies who deal with these products on a day to day basis don?t really understand them (let alone some CFO who doesn't deal with the product).
  
  If you said you acted as an actuary for an insurance company and designed products, then your comments might have some validity.
  
  Why don't you stop talking about things you don't understand and take good information from people who are trying to be nothing but helpful.
  
  It is crystal clear you are not an expert when it comes to the use of EIUL policies to grow wealth nor do you fully understand the practical uses of insurance in general for wealth building.
  
  As for your cool aid drinking attitude towards MN life, I could post stories on this site that would make you ill from some of the things MN life has allowed in the STOLI (stranger owned life insurance) market.
  
  Why don't you let the real experts post on this site so that those who read the blog can learn vs. posting your uninformed opinions (which simply mislead the ignorant reader).
  
  To illustrate further your ignorance of the "best" EUIL policies, I?d like to let you know that if you use MN's EIUL policy and illustrate it at less than let's say 7%, a client would wish they'd never hear of EUIL.
  
  This is part of the problem with the insurance industry in general. Agents do not understand the products they are selling and consumers don't understand what they are buying. There are only a few products in the industry that are designed to perform well even if the returns dip down to 3%.
  
  Just for fun, I ran an EIUL illustration with a policy that is designed to perform well in a not so terrific market (and it's not MN life).
  
  I used a .5% mutual fund expense (which is 1% or more below the industry average). I used a 10% blended cap. gains and dividend tax rate on the growth (which is a joke, but I did it to illustrate my point). I assumed NO local money manager fee.
  
  I assumed a gross rate of return in the mutual funds at 6% and a 6% gross rate of return in the EIUL policy (and I used wash loans if you know what those are). And I assumed the market did not tank 59% like it did in our recent stock market crash right before the example client chose to take his money out.
  
  I used a 45 year old male in good health. I had him put in 15k a year into a mutual funds from ages 45-64 and the same amount of money paid as premium into the EIUL policy. Then i assumed the client took out loans from the policy from ages 65-84. He could remove $42,037 tax free via policy loans from the policy each year (and there was a $760,000 death benefit to boot).
  
  Out of the mutual funds after expenses, he could remove $37,224 a year from ages 65-84.
  
  So the EIUL policy generated $4,813 more a year in after tax, after expense money to be used for retirmeent and the client had a $760,000 DB along the way. And oh yah, if the stock market tanked 59% during the life of owning the EIUL policy, in the negative years, the return in the policy would equal zero (yes, zero is your hero when he market tanks).
  
  The bottom line is you are way over year head with this discussion.
  
  Not only do you not understand EIUL and cash value life insurance policies well enough to have this debate, not only do you not know enough about the industries or companies to decided that MN life is a good company, but you don't understand the math that is needed to even begin this debate.
  
  So please, either educate yourself better on the issues you are discussing or stop pontificating on subjects you are not qualified to discuss.
  
  Oh, and finally, stop talking about MN life saying they wouldn't sell the product to someone without an insurable need. As I stated early, that's a non-issue and posting as such simply makes you look like you have no idea what you are talking about.

•  
  88

  Allan Roth

  10/21/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  roccycwpp,
  
  When you write:
  
  "To illustrate further your ignorance..."
  
  Calling me ignorant is the most used term by insurance producers in communications to me. In actuality, I worked with two actuaries who reported to me to design products.
  
  I don't doubt you can run an illustration that looks good. I doubt you can actually achieve stock market returns without risk. I can run an illustration using garbage inputs to get garbage outputs.
  
  Here are some facts in my dealings with Bret A, the producer that are very common among producers:
  
  1) Communications were extremely bias - for example, never was it brought up in emails or phone calls that the insurance company had the right to lower caps or that I was paying for insurance. It was all buried in the literature.
  
  2) Communications were false - for example, Brett stated Minnesota life had never lowered the caps and that the insurance regulators demanded this unilateral right to lower the cap to 3%. He stated that the S&P 500 index was the market return, rather than having dividends stripped out.
  
  3) Communications contradicted prior communications - for example Brett A stated an insurable need "is not a factor in choosing to invest money in this product - it is incidental." Later, he claimed I had an insurable need.
  
  4) You and Brett continue to recommend a product whose manufacturer, Minnesota Life, states I have better options to invest directly in a similar strategy and disintermediate producers and the insurance company. You should feel free to contact Benjamin Roth to see if your claim of the insurable need is a non-issue to them.
  
  5) When the facts don't support the claim of:
  
  "I can blow away saving for retirement in any market fund, with an Indexed Life policy. How about a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk."
  
  You revert to calling people "ignorant" or other personal insults.
  
  Your income depends on you not understanding how an insurance company makes money. I never dreamed I would convince you. My goal was to either find a better product or point out to consumers the tactics used to sell this stuff, which makes the mutual fund industry I'm so critical of, actually look pretty good by comparison.
  
  

•  
  89

  Brett A

  10/21/09 | Report as spam

  Best Indexed Life

  Roccy and I had an email conversation 1/09 about comparing another co. (X) and Minnesota Life. His claim was that X is better, and that the comparison needed to be run at 7%. I explained to him you could not fairly compare IUL with different caps at a same ill. rate because the cost structure was designed for the cap % used. In his quote below you can see he came to agree.
  
  Roccy (quote): I agree that it?s a tough comparison to illustrate them both at 7% because the MN life product has a higher cap ? I NEVER use the default (illustration) rates ? (X) has a 140% crediting option (so) is the best product out there if you think the market returns will be modest. There is no comparable product out there. As far as high cap products are concerned, I?ll have to look at MN Life (unquote).
  
  As for his preferring co. X, it was because they have a 140% option. Since then Minnesota has also added this option with a 14% cap. The cap for co. X for the policy Roccy prefers is currently 11%. This plan though also has a 5 yr bucket which means you cannot change your strategies for 5 years. This plan also has a different lower cap for years 2-5 which is only 10%. It also has higher expenses than Minnesota Life.
  
  If you run a projection using actual policy expenses (Minnesota is 25% less) and current caps (for co. X it is 11,10,10,10,10) against actual gains of the S&P 500 index the past 20 years, for a $12,000 annual premium for someone age 50, today the cash value with Minnesota in year 20 is $525,672. For X it is $385,287. (A mutual fund with gains equal to the S&P 500 index less 3% in avg. fees (Morningstar) would have a net value of $318,969). I think it is fair to say that the plan he prefers is clearly not better than Minnesota. I do not think he has looked at Minnesota yet.
  
  I look at all the companies and run projections using each companies actual policy costs and current caps - not a company illustration rate. I apply these against the actual S&P 500 gains the past 20 years. I then determine what illustration rate (IR) in the company software would give me the same cash value. For every company except Minnesota the IR value is always less. For example for co. X the current IR is 7.8%, but the rate to give me the same CV is 6.01%. This is because their system does not factor in the lower cap rate in years 2-5. For Minnesota their current 20 year IR is 8.53%. For the same CV it would need to be 9.41% - the only co. that is higher than their actual current rate. This was not meant to be a commercial but I need to stand up when someone claims an inferior policy is better. When you look at all aspects of each companys policy, Minnesota Life is currently the best.

•  
  90

  Allan Roth

  10/21/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  To confirm, you run illustrations with assumptions that don't come from Minnesota Life or those from the insurance company issuing the policy?
  
  

•  
  91

  Brett A

  10/21/09 | Report as spam

  Minnesota Values

  Quite the contrary - for both companies these are run with actual policy costs (from the policy illustration), current caps and participation rates, applied against actual S&P 500 index gains the past 20 years the same as the companies do.

•  
  92

  finnetusa

  10/21/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Allan,
  Please learn to read each post carefully before you post such a question. Mr. Anderson did not say what you asked. Got back and read it again. First, seek to understand, before you seek to be understood.
  

•  
  93

  Allan Roth

  10/21/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  finnestusa,
  
  Brett noted "I apply these against the actual S&P 500 gains the past 20 years."
  
  That's not how the illustration from Minnesota Life was run.
  
  Thanks for the lecture, though I'm not sure why you think questions are inappropriate. I'd still love a response from Brett as to whether he still thinks my statement regarding Minnesota Life not recommending this product for me is
  
  "an outright LIE - this is not the honest contetxt of what the Minnesota actuary said to you." (misspelling left so as not to change his statement).
  
  Remember, the claimed goal is learning so I welcome all questions more than insults and lectures.

•  
  94

  Brett A

  10/21/09 | Report as spam

  Cash Values

  They do it exactly as I stated. The only difference is they use only the annual gain of the S&P index on Dec. 20 to apply the cap and participation rate against. As I explained near the beginning of this column, I use the average of the quarterly annual gains for an annual gain to use. Based on the resulting CV they determine what rate would result in the same 20 yr CV so that a computer has a % value to run the illustration. If Allan would take the annual premium (+ existing CV), deduct the annual costs and multiply that by the policy IR he would get the CV shown on the illustration. The only other variance is this % # would vary a bit by age as the costs would be different, so the companies average it out to come up with the IR used for all ages.
  
  The ones I stated in #89 were the results for a M50 and the particular policy parameters used to compare apples-apples against other policies. When there are zero gains, I deduct the expenses from the CV (and for all years). When there are gains I add them based on the years actual average gain. If Minnesota life ran this CV projection based on using actual costs and Dec. gains of the S&P the past 20 years you would get the same value with the program I use - I know because they have run it for me.

•  
  95

  Allan Roth

  10/21/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  Thanks - In the interest of learning and being truthful, I'd still love a response as to whether you still think my statement regarding Minnesota Life not recommending this product for me is:
  
  "an outright LIE - this is not the honest contetxt of what the Minnesota actuary said to you." (misspelling left so as not to change your statement).
  
  I'm gathering you've spoken to the chief actuary about our three conversations.

•  
  96

  Brett A

  10/21/09 | Report as spam

  Insurable Interest and other Factors

  I have some time again to focus on this for a few minutes, so first lets address the LIES made by Allan in #86 and #88. Let me start too by saying that when I accepted this Challenge I did so with the hope that he would have a fair and open mind - he has proven with his continued battering at completely irrelevant issues already answered over and over, and refusing to address any of the actual merits of IUL, that he is not. Also, when we first spoke Allan told me he does not have an insurance license and had no knowledge or understanding of Indexed Life. Unfortunately that does not seem to have changed. So his only game plan is continued deflection and ignoring them. I hope for your own benefit that you will examine all the evidence I have provided to counter this including:
  
  1) I NEVER told Allan that the company had never lowered it caps and never would. This is another LIE. If he only opened my book he would know this is so. Why would there even be a minimum guaranteed rate if the company could not lower the cap? It also states in the illustrations I sent to him: the co. can change the cap.
  
  2) I NEVER said anything to him about self insurance. But I believe it is dumb to self insure for a life insurance need.
  
  3) He says I never told him he was paying for life insurance. Another LIE. I was insistent from the beginning that he understand this was a life insurance policy. That (and any investment) inherently have specific costs. A life policy has life costs. He even acknowledged this in response to comments from readers correcting him in a prior column, this was for life insurance. I sent him company and custom illustrations that specifically listed these costs.
  
  4) He says I said an insurable need "is not a factor in choosing to invest money in this product - it is incidental." If I did that is True - a life insurance need is not required (see 7 below). There are many other benefits to owning a policy that you cannot get in any other investment that are legally valid reasons to buy it or they would not be legally approved benefits. These include:
  
  a) Gains linked to the S&P 500 with no downside market risk (savings insurance).
  b) Taking out gains as loans does not go in formula to tax Social Security (income protection insurance).
  c) You can take out the gains as a loan Tax Free (tax rate increase risk insurance). (Loan Method required by Congress).
  d) If diagnosed as terminal the company will advance up to $1 million while alive (staying alive insurance).
  e) You can access the money without penalty and continue to earn gains linked to the market before 59? or pre maturity date. You cannot do this with the zero coupon bond + stock strategy Allan promotes, except by surrender and/or selling it (Emergency and Liquidity insurance).
  f) A 3% minimum guaranty (Principal/contributions insurance).
  
  What about a life insurance need? In the 80?s investors were putting large amount of money into insurance that had a very small life insurance amount just to take advantage of the Tax Free withdrawal benefits. So Congress changed the rules specifically to regulate the purchase of life insurance by INVESTORS -- this is IRC #7702. This specifically outlines the minimum insurance rules INVESTORS (and others) have to abide by, to be able to take gains out of a life insurance policy Tax Free. There is however NO legal requirement that if you buy life insurance on yourself that there has to be a need for life insurance. But the plan must have X amount of insurance (based on age, gender and premium) in it to qualify for the Tax Free benefits that come with the policy. That is fine - and there are easy ways to reduce the amount required to the minimum required by Congress to reduce costs and so maximize the IRR over time to 7-9% NET for most.
  
  5) It is a LIE that I told Allan he had no insurable need. I have no idea if he does or not, but my guess is he does. 99% of us do. I wrote before that we never discussed this for me to know.
  
  6) He says I said: A zero guaranteed value equates to NO downside market risk. This is another perfect example of him purposefully taking something out of context and trying to turn what is a positive into a negative. It is true and a primary reason investors will put $1 billion of new 1st year premium into IUL this year! In the context it was said, if the index has a negative return for the past year Indexed Life guarantees the company will deduct ZERO of those losses from your Cash Value. Each year and decade as you accumulate gains you KEEP ALL OF THEM less only policy costs. The average annual expense over 26 years for Allans MEC proposal was 0.36% per year! Name ANY other investment with an expense cost as low and net gains as high!
  
  7) What about this requirement to have an Insurable Need? What you need to understand about insurable interest is that there are two kinds:
  
  A) Someone else getting insurance on your life. For this there needs to be a valid interest to want you to stay alive. Or else the mob would buy a policy on you.
  
  B) Getting it on your own life. There are NO limitations of what defines this need - you can have life insurance for whatever reason you want even if there is no specific need for it to financially protect another person.
  
  (Allan complains the source I listed for this came from an insurance article. It came from a legal site that runs commercials too as almost every site does - in this case there were some for term insurance - I have no idea who for. Allan should look at his own site - they also run commercials. Because it has Fedex under his picture is what he says on this site false?)
  
  Here is what the actuary said to me about the conversation with Allan:
  
  (quote) Individuals can buy insurance on themselves for any reason that they want to. No question at all about that. Investment oriented individuals generally have a hard time getting past the insurance extras that they have to buy to get at the investment. He (Roth) asked, what if I do not need life insurance. I responded that anyone who has a financial plan with no life insurance has an extremely unusual situation. The vast majority of Americans have a life insurance need. Planners who suggest and do otherwise are likely doing a disservice to their clients. In the end, he chose to extract only the words that helped him to make his story. (unquote)
  
  If you have no life insurance need and you still wanted to have an IUL with all its benefits, guarantees and LOW cost you CAN. Congress says so. All 50 states have specifically approved these plans and benefits so you can.
  
  8) What about Long Term Care (again for the 3rd time). This is the explanation posted in #9 about the need for LTC. I also explained it again for Allan in a reply after that. A couple can die and never need LTC -- that is covered in Option 4 below (as I told him before). On the flip side they may both need it. Based on the U.S. Government statement that the odds any one person needing some care over age 65 is 70%, the average need per couple will eventually be 100%. These are the four possible scenarios:
  
  1) Each spouse needs LTC: 100% + 100% = 200%.
  2) Husband only needs it: 100% + 0%
  3) Wife only needs it: 0% + 100%
  4) Neither need it: 0% + 0%.
  
  Even Allan can add up the columns and divide by four: 400% / 4 couples = 100% chance of 1 need per couple on average. This does not mean each couple will have one need - only the average. According to MET Life and other sources, the average time of Nursing Home need is 2.4 years.
  
  I realize Allan needs to obfuscate, but I think even the 2nd grader in his book would understand this after 3 times. Why does he insist on pounding away at this and other non-issues instead of addressing the actual benefits and merits of Indexed Life? All he is doing is depleting his credibility by continuing to do so.
  
  
  9) Finally, what about this Zero Coupon bond method? For the sake of argument I conceded a long time ago it had more return than IUL. But does it - after taxes? With that method all those gains are subject to Capital Gains tax or - if in a qualified plan - ordinary taxes. The net IRR just went down. Those gains eventually taken when taking Social Security go into the formula to tax Social Security. So the net IRR just went down again. If tax rates go up in the future your IRR just went down again. Also what is the cost to have no liquidity (above) before maturity? Also, Allan has presented NOTHING to show what the typical net return would before over different, lengthy periods of time whereas I have for the IUL. Are the average costs really less than IUL? There is an old saying: It does not matter what you make - it matters what you KEEP! Nothing out-KEEPS IUL long term when you factor in all related taxes and costs!
  
  
  10) Allan recently raised the time period for consideration from 10 to 26 years. In this case we can look at the 5 pay, Tax Free version of the IUL for the Challenge: http://www.keepandshare.com/doc/view.php?id=1473914&da=y . Look at year 14 - he can start taking out $20,000 per year in Tax Free Income! The NET IRR in year 26 is 8.08%. Social Security is NOT taxed because of this. It is exempt from All tax rate increases! The average of ALL expenses including insurance over the 26 years is 0.63% per yr. Look at year 6 and you will notice the insurance drops from $447,460 to $163,581. This is something anyone can do within the parameters of the rules set up by Congress to minimize insurance costs and increase CV and so IRR. But most agents and laypeople do not know you can do this (not Aviva - they will reduce the insurance but not the costs). One of Roths many deflections was to complain - and an excuse for not doing this plan - that I did not tell him about the exorbitant insurance costs in the later years. The expense factor for ALL costs in year 20 is 0.016%. In year 30 it is 0.017% ($1,506 on $869,000. A mutual fund with avg. fees of 3% would cost $26,000!). If that is exorbitant I apologize.
  
  The 8.08% IRR reflects the cap rates based on historical low Fed. interest rates today of 0%. At average rates long term (and so a larger option budget), caps at a minimum will likely average 2% higher. The net IRR could very well be 9%! For a Qualified Plan you will need to net with a 35% mtr 13.85% to equal this. If it goes to only 40% you need to net 15%!
  
  Can anyone show me an investment NET IRR with NO market risk equal to this? How about with risk? You CAN NOT do it! Even if you could, none of them will include all the other benefits - because legally only life insurance can!
  
  11) Estate Taxes. For the person who asked about this on $1 million in 30 years, why are you not adjusting for inflation? At the avg. of 4% since WWII this would increase to $3,343,000. But that is irrelevant - Congress can change the exempt amount and % of tax at anytime and it would apply to any kind of asset. You cannot make choices based on what Congress might do on estate taxes over the next 30 years.
  
  Summary: DO YOU REALIZE ROTH HAS NOT ONCE REFUTED THE POSITIVE BENEFITS and IRR OF IUL or the ACTUAL ORIGINAL CONDITIONS OF THIS CHALLENGE?! After being asked if he could do so many times! He CANNOT, which is why his only hope is that you will continue to not notice the endless deflections and a strategy of ignoring the real MERITS of IUL, and the actual Challenge factors: limited downside market risk, and 8% net of fees IRR in year 10. I ask for proof there was ever anything else and he provides NOTHING! I?ve met all those conditions and more!
  
  If Roth ever really addresses any issue that matters, someone please let me know.
  

•  
  97

  Allan Roth

  10/21/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  The illustrations and the emails are from you - you can't take them back.
  
  Your challenge was:
  
  "I can blow away saving for retirement in any market fund, with an Indexed Life policy. How about a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk."
  
  You returned with a vehicle that had more downside risk than a 60/40 portfolio and which the insurance company controlled the payout. Commisions for you were great!
  
  I'll be happy to give you another chance to meet that challenge but I'm not your usual prospect. I read the policy rather than just your sales pitch.
  
  Your communications are very biased. Wouldn't he Minnesota Life officer have defended you if he agreed with you? Why does he continue to talk to me?
  
  He is transparent in going through the issues as to how the product is designed.
  
  I wish it were required that all producers do the same. I do applaud you for choosing an ethical insurance company for this challenge. I've had officers of other insurance companies use similar tactics you use.
  
  I want market returns without risk for my family - I just want to mark sure they are real first. Your submission wasn't close. Minnesota Life agreed and you didn't have the judgment to stop arguing that the numbers you submitted met that challenge.
  
  
  
  

•  
  98

  r_buckner

  10/21/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  I sell term life insurance, but I have tried my best to keep an open mind on the IUL product. I have studied an IUL Policy Illustration for a 25 year old with a $1.5 million Death Benefit. (Initial Annual Premium: $109,248) Ten year Account Value: Non-Guaranteed $189,861/Guaranteed $112,387. It seems like you either come out on one side or the other with your opinion on this product. I did find a very good, real-world, unbiased description of pros and cons.
  
  "There are a lot of different types of UL.
  
  The good is it's more flexible than straight whole-life. You can over fund, under fund build up a lot of cash in it etc.
  
  The bad is MANY people have lost their policies and all their money with UL because they didn't understand what it is and thought of it as straight whole-life. It's more complicated.
  
  The no lapse ULs are the cheapest way to have a permanent death benefit provided you never miss a payment OR routinely pay late. My opinion is that many of these will also lapse because people are not that structured their entire life. When they get old and children take over bills, many times things have already gotten out of control. If this account overdrafted- policy guarantee is probably gone.
  
  People go on Medicaid, people change bank accounts, people move and miss billings, people forget.
  
  It's a 50-year old that you are selling it to and fully understands but it's a 90-year old that has to do everything just right to keep the guarantee in force (40-years later)
  
  I would definitely educate your client about the difference in straight whole-life and guaranteed UL and let them decide. If they go UL, I would recommend they overfund it during the early years to give it a head start.
  
  UL is not a bad product, it's just more complicated and there are more possible ways for people to lose ALL their money with it. And when that happens they ALWAYS feel like the agent screwed them."
  
  
  ------------------------------------
  J Scott Burke
  Life & Health Agent
  IMO for Final Expense
  

•  
  99

  roccycwpp

  10/22/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Wow, what a bunch of nonsense.
  
  Let's get off the MN life discussion. Their product is a good product if you want a "high cap" product. If the S&P 500 does well over time (returns that would average 8%+ in the policy or higher), then the MN life policy will perform well.
  
  If the returns are less than 8%, then another product would either outperform or significantly out perform the MN life product.
  
  It is accurate to state as I have on other message boards that it's not fair to compare a high cap product with a low cap product when using the same illustrated rates. That's why when I have compared MN life to other products designed for less robust markets, I make sure I illustrate MN life with a 1-1.5% higher crediting rate (although this part of the discuss on this message board it totally irrelevant).
  
  I got involved in this discussion because it was clear that Allan does not understand EIUL and does not understand the differences of the products in the market.
  
  Further, he does not understand the math behind comparing in the "real world" using cash value life to other wealth building tools.
  
  My statement that Allan is "ignorant" as listed above has been proved to be accurate by his posts.
  
  It's not the end of the world. As I indicated, 95% of the insurance agents selling the products don't understand them and it make sense that Allan (someone who doesn't sell them) wouldn't understand them either.
  
  I also don?t' care about Brett's comments. My concern is someone like Allen who holds himself out on the web as an expert making inaccurate or false statements and then having consumers read them and take these statements as truths.

•  
  100

  Dylan R

  10/22/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Reading all of this, it becomes quite clear that Brett just
  doesn't get it, and like Allan said, his income relies on him
  not actually getting it. So I don't think I ought to try
  changing his mind, but I do think I can help him with his
  misunderstanding of probabilities.
  
  Using Brent's math to examine the chances
  of one member of couple being trampled by elephants
  before turning 65, we can see that there are the four
  possible scenarios:
  
  1) Each spouse gets trampled: 100% + 100% = 200%.
  2) Husband only is trampled: 100% + 0%
  3) Wife only is trampled it: 0% + 100%
  4) Neither are trampled: 0% + 0%.
  
  Add up the columns and divide by four: 400% / 4 couples =
  100% chance of 1 person in the couple being trampled by
  elephants before age 65. Scary, isn't it? Or do you now see
  the flaw in your logic?
  
  Allan, you are doing a great job (with a lot of unintentional
  help) exposing the way these products are sold.

•  
  101

  Allan Roth

  10/22/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Dylan,
  
  Great explanation!
  
  I use the two coin flip to explain - If I flip two coins, each has a 50% of coming up heads.
  
  Using Brett's UIL logic, because each coin has a 50% chance, then 2 coins must have a 100% chance (2 x 50%). Thus, in Brett's universe, there is a 100% of getting at least one heads in any two coin flips.
  
  I hope insurance regulators don't use this logic.

•  
  102

  Allan Roth

  10/22/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Examine the facts of the challenge:
  
  "I can blow away saving for retirement in any market fund, with an Indexed Life policy. How about a NET return of 8% that allows you to take out the gains Tax Free for retirement income, with NO downside market risk."
  
  1) "How about a NET return of 8%"
  
  The illustration showed 8% using input assumptions picked from a historic period where the raging bull began. Insurance company had a unilateral right to lower returns and had already done so this year.
  
  2) "that allows you to take out the gains Tax Free for retirement income"
  
  Brett proposed a product that did not allow me to take out any gains as he used a MEC. In reality, in a non-MEC, any gains are borrowing your own money which can create catastrophic tax consequences if the policy lapses
  
  3) "with NO downside market risk.
  
  Per the illustration numbers provided by Brett, guaranteed returns were as follows:
  
  1-Year return: -10.3%
  10-Year return: -4.9%
  26-Year return: -100.0%
  
  I don't see this as "no downside risk" and it happens to be far riskier than a low-cost balanced portfolio.
  
  The bottom line of the disagreement is I see the facts provided by Brett, the challenger, as failing the challenge. The challenger, Brett, and certain insurance producers see this challenge as having been met and I'm an "ignorant" writer prone to lying.
  

•  
  103

  roccycwpp

  10/23/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  In my opinion both Brett and Allan have failed this challenge.
  
  Brett has failed because he can't communicate in English the value and benefits of EIUL and he doesn't know how to illustrate real world returns and compare them to mutual funds.
  
  Allan has also failed, because it is clear he doesn't understand EIUL or the math supporting its use to help clients build wealth in a safe and tax favorable environment.
  
  I suggest we focus on the numbers.
  
  Let me re-input the numbers from the example I inserted above.
  
  Just for fun, I ran an EIUL illustration with a policy that is designed to perform well in a not so terrific market (and it's not MN life).
  
  I used a .5% mutual fund expense (which is 1% or more below the industry average). I used a 10% blended cap. gains and dividend tax rate on the growth (which is a joke, but I did it to illustrate my point). I assumed NO local money manager fee.
  
  I assumed a gross rate of return in the mutual funds at 6% and a 6% gross rate of return in the EIUL policy (and I used wash loans if you know what those are). And I assumed the market did not tank 59% like it did in our recent stock market crash right before the example client chose to take his money out.
  
  I used a 45 year old male in good health. I had him put in 15k a year into a mutual fund from ages 45-64 and the same amount of money paid as premium into the EIUL policy. Then I assumed the client took out loans from the policy from ages 65-84. He could remove $42,037 tax free via policy loans from the policy each year (and there was a $760,000 death benefit to boot).
  
  Out of the mutual funds after expenses, he could remove $37,224 a year from ages 65-84.
  
  So the EIUL policy generated $4,813 more a year in after tax, after expense money to be used for retirement and the client had a $760,000 DB along the way. And oh yah, if the stock market tanked 59% during the life of owning the EIUL policy, in the negative years, the return in the policy would equal zero (yes, zero is your hero when he market tanks).
  
  -It is a fact that a client's money will not go backwards in an EIUL policy because of negative returns. This is the protective feature of the product and why as an asset allocation model many clients should have money in these policies. However, for full disclosure, in down years, the actual cash in the policy will go backwards slightly to pay the costs of insurance.
  
  Again, from what I can tell, no one posting on this site knows these products well enough to pontificate as they have been.
  
  Again, the problem with blogs.
  
  I submit to any consumer who reads this that they can learn the lesson that few advisors understand the math of wealth building products being offered to their clients.
  
  Be careful who you take advice from because taking it from someone who?s "ignorant" about the viable wealth building tools could cost you dearly.

•  
  104

  Allan Roth

  10/23/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  roccycwpp,
  
  A couple of points -
  
  1) I don't dispute you could compare apples to oranges with unreal assumptions and come out with an illustration that an insurance investment in mostly bonds and some equities, less costs, commissions, taxes, and profits comes out with a higher return that a completely different asset class mix. I just question the assumptions and the applicability.
  
  2) Regarding your statement
  
  "Allan has also failed, because it is clear he doesn't understand EIUL or the math supporting its use to help clients build wealth in a safe and tax favorable environment."
  
  Thank you. My whole life I've been called a math geek and your statement kind of makes me feel good. I think I'll forward your statement to the Minnesota Life Actuary who must have the same misunderstanding and "ignorance' of the math that I have?
  
  

•  
  105

  roccycwpp

  10/24/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Funny. Go ahead. Most of their entire staff gets my weekly newsletters, know my opinion of their product, and they are familiar with my distain for people who do not understand the math when talking about EIUL or building wealth with cash value life specifically.
  
  You may consider yourself a math geek, but you have not put in the time needed to understand the topics you are talking about in this blog.
  
  If you put in the time, I?m sure you would understand the math and you'd be doing readers of your blogs a service by learning it.
  
  Make sure you copy your correspondence to Ben Roth at Minn. life. You might also send him to this blog so he can give you his opinion of your comments (ignorant and valid ones you've posted).
  
  To the extent you'd like to learn this subject better, feel free to e-mail me directly at roccy@thewpi.org and I'd be happy to send you a complimentary copy of my new book Retiring Without Risk. It would be a good starting point for your education on EIUL policies and their use in the real world as a wealth building tool.

•  
  106

  Allan Roth

  10/24/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  roccycwpp,
  
  Ben Roth at Minnesota Life is well aware of this blog. If you had read this, you'd have seen Ben Roth is the person who stated there were better products for this challenge, which did not involve an insurance need. We seemed to be on the same page on the math and the design of the product.
  
  I'd love to see your newsletter and book. I'll email you.
  

•  
  107

  Brett A

  10/24/09 | Report as spam

  More LIES by Allan

  1) The illustration showed 8% using input assumptions picked from a historic period where the raging bull began.
  
  Answer: You mean 65 years ago? The fact is - and he knows it and I?ve posted them by link in this blog - the illustration rate used is actually less than the average credited gain based on the past 10, 20 and 30 year gains of the S&P 500 Index over the past 65 years. He knows he is lying by saying it is based on raging bull assumptions.
  
  2) Insurance company had a unilateral right to lower returns and had already done so this year.
  
  Answer: Sure they do. In this case the cap dropped from 17% to 16%. This is why there is a minimum gty. If they have a fixed $X budget and the cost goes up it naturally follows they can only buy less of the item - in this case options on the S&P index. We ALL know Interest rates are at historical lows (0%). As they increase again so will the cap on the IUL. The cap today on one of the oldest IUL?s is the same as it was 10 years ago - inbetween it was only higher. The more guarantees (and so costs) you want, the lower the cap and potential gains. The stock market has no minimum or principal guarantees. All the studies show people are more than willing today to give up potential higher gains for more safety. If you want 100% guaranty the rate can?t go down then go buy Allans Treasury with a 3% return.
  
  3) Brett proposed a product that did not allow me to take out any gains as he used a MEC.
  
  Answer: That is another lie - I gave him a choice which he refused to make. I made it very clear to him that the MEC gains would be taxable when withdrawn. He was given a choice because of his 10 year condition to have achieve an 8% net IRR. He has since raised it to 26 years (see #5) eliminating this requirement.
  
  4) In reality, in a non-MEC, any gains are borrowing your own money which can create catastrophic tax consequences if the policy lapses.
  
  Answer: This has to be boring for all of you too - responding to the same issue over and over to someone with the cognizance of rock it seems. The requirement to borrow the money out to receive it Tax Free is that of Congress. And as has been said several times the IUL comes with an Overloan Protection rider that guarantees the policy will never lapse and cause this taxable event. How many times can Allan ignore being told of this feature (and others) before he loses all of his credibility and integrity?
  
  5) "with NO downside market risk (but the )guaranteed returns were as follows:
  1-Year return: -10.3%; 10-Year return: -4.9%; 26-Year return: -100.0%.
  
  Answer: We have been over and over this, so it is a perfect example of Allan having no valid argument against Indexed Life so he has to beat this to death. These returns will happen only if 2 conditions occur: The S&P essentially has a 0% return every year for the next 26 years (the 20 year S&P avg. the past 65 years is 7.93%) AND the company increases the costs in the policy to the maximum allowed (in 128 yrs. they have never increased the costs of an issued policy) starting the year it is issued.
  
  The REALITY is the Indexed Life policy based on historical performance of the S&P the past 65 years, and practice of the co., will perform as good - and more than likely better - than the conditions of the Challenge.
  
  6) Why does not the actuary for Minnesota respond in this column?
  
  Answer: Because as much as he disagrees with Allan?s twisting of the facts (which I quoted him saying Allan did in my prior response and for which Allan had NO reply), his hands are tied because of his position. The lawyers will not allow him to because anything he says directly anywhere - no matter how innocuous or true - can be the cause of a suit by any moron looking for a payday.
  
  7) As for Roccy and his continued propaganda that X policy will work better than a high cap product when the actual Index has low performance, this is a joke. His underlying basis is that the lower cap product can do this because it has lower costs, when in reality in this case it is 25% more. Strike one. To offset this he prefers a 140% participation rate option offered by X -- Minnesota has it too. Strike two. Yet somehow he wants you to believe a lower cap over a 5 year index lock-in period of 11%, 10, 10,10,10% will be better than 14% all 5 years. Even our moron is not dumb enough to fall for that. Strike 3 - he is OUT! It is because of this type of math that many agents who have read his book say they prefer mine by far.
  
  Summary. Roth lost this challenge and he knows it. More importantly so do you. Because anytime when someone spends 100% of their time on factors that do not matter and have nothing to do with the actual challenge requirements, you know you won. There were ONLY 3 conditions:
  
  1) Show limited downside risk: Your principal and earned gains do NOT go down with the market. This factor goes to IUL.
  2) Show an 8% IRR net fees. This factor goes to IUL.
  3) Do #2 by yr. 10 -- later increased to yr 26. This factor goes to IUL.
  
  After asking over and over that he do so, he has NOT posted anything that shows there were any other conditions.
  
  Because he knows there were NO other conditions. I foolishly assumed this would be decided by what would likely be the real outcome 99.9% of the time. Not on completely irrelevant things like the probability of LTC. Even if I?m wrong (and I am only if the U.S. Government and Met Life statistics are), what does it have to do with this challenge? Absolutely nothing. Insurable interest? Guess what - NO response from Allan after the explanation I posted but he focused all his attention on this non-factor for over a week to avoid the real issues. The heart of his pounding on this were the costs of insurance - but the truth is the TOTAL average costs of the policy (which include commissions) at 0.63% are less than almost anything else you can do! So now there is silence from him on this.
  
  For almost two weeks he has refused to address any of the real benefits with Indexed Life or the real likelihood of the gains - just saying the same lies over and over again that even his readers say are no longer an issue. Do you notice he did not reply to any of the prior statements I had proved he lied about? You cannot have an intelligent conversation of integrity and credibility with this kind of a person. That conversation would have been one of saying, what about this and what about that. Not saying IUL - or anything else - had no merit because if the S&P has a 0% return for 26 years in a row AND the company increases its cost to the maximum, it will be worth $0. Guess what - so will the stock part of his investment! If anyone out there wants financial advice of value, I think he has proven himself that you need to look somewhere else!
  
  Roth refused my challenge of having his wife say which plan she would prefer - because he knows what her answer would be! No one is responsible for your retirement but you. I hope that gives you a clue that for a simple plan with the potential for earning index gains - and KEEPING them - the right Indexed Life plan is second to none! If anyone can show that anything else can perform better than IUL with market risk or not, and with lower costs and comparable tax protection, then let me know! Otherwise, this chat was interesting but it is time to move on to a forum where it is possible to have an intelligent conversation about the actual MERITS and TRUTH about IUL!

•  
  108

  roccycwpp

  10/25/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  No, i didn't notice that Ben was on this blog. I only got on this blog when another advisor asked me to post to try and give some real world numbers it.
  
  I've not read every post, just sort of glanced through most of them until i found a few that I figured I needed to comment on.
  
  As for the book, yes, please e-mail me your contact info, I'll shoot one out to you. I will then also add you to my newsletter list as well.

•  
  109

  roccycwpp

  10/25/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett,
  
  If you are going to talk about why I like product X better than Minn. Life, at least quote me accurately.
  
  I like another product better than MN life because it has a 1.25% premium bonus that will kick in in year 11. That's why the cap is lower.
  
  Because I really could care less what company an advisor or client uses, let me re-re-re state for the record that the MN life product is a very good product if you want a high cap/no bonus product.
  
  i just don't believe the market it going to be that great going forward and so I prefer to use a lower cap product that has a bonus in it and is designed to illustrate and perform well with returns as little as 3.5%.
  
  If you illustrate the MN life product below 7.5% (or almost any of the other products out there), it will flat out stink. I don't think clients want to see 8%-8.5% illustrations right now.
  
  I have been illustrating lately at 6.5% with 6.5% loans. I think that is fairly conservative.
  
  I sure hope MN life is paying you well to be their marketing B.

•  
  110

  DougDiggerEberhardt

  10/25/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Some unanswered questions and points of discussion.
  
  1. Would like to see the same 52 year old illustration with a "Overloan Protection rider that guarantees the policy will never lapse and cause this taxable event." to see what affect it has on the income taken run through age 110 (or as long as Minnesota Life allows), at a 6% current rate of return (as I agree with roccy that the future seems a bleak for stocks as p/e ratios are currently out of whack and we may experience another lost decade ala Japan's Nikkei experience - maybe - I just want to see the numbers). The historical rate of return for the S&P included 60% of which were dividends (6% of 10%) and today dividends are paying around 2%. We're in a secular bear market and I don't see capital growth obtaining the remaining 6% to acheive an 8% return when historically it has only been 4%. Roccy, could you put your companies illustration online for all to see too?
  
  2. Could Brett or Roccy or any other insurance agent reading this please provide me with the Internal Revenue Code that says my loans of over $800,000 (per the illustration for the 52 year old male), will not be added to the death benefit for estate tax calculation purposes at death (assuming death occurs before lapse). I did look for it, but can't find the specific code addressing loan inclusion in the estate for calcualation of tax purposes. The $800,000 of loans added to the death benefit and the rest of one's estate could trigger estate taxes depending on current tax code and I believe this to be a valid question). Just the code please. No speculation.
  
  3. Allan, go sell some UIL and stop wasting your time here. It will NEVER turn out to your satisfaction.
  
  4. On a personal note Brett, it is better to use the Socrates approach to influencing people rather than an reply only approach. You need to take control of the conversation by asking questions. Allan does it quite well by repeatedly asking you questions "yes" or "no" that seem to go unanswered via your replies. If you were to do the same to him, then you might possibly get somewhere, but don't make it a long drawn out reply.... I know you insurance agents were taught the KISS method the first year of training. No offense.
  
  5. Lastly, I had said this product is not for me as I don't have enough control. There are too many varaible's that "could" change. One glaring example with Minnesota Life is their return on investments is presently under their 3% minimum guarantee I pointed out in comment #41 where it shows their "current" return to be 2.65%. Read comment #41 for source. These figures are current. If we experience a lost decade ala Japan, which would be fine with our government at this point because they can't afford to have the Fed raise rates and destroy the economy (and the stock market). Granted, maybe a quarter point to fool us and let the Chinese and Japan think we support a strong dollar, but I digress...
  
  6. Seriously Brett, you have better things to do....and so do I for that matter. This is beginning to look like the movie Groundhog Day for you eh?
  
  
  

•  
  111

  DougDiggerEberhardt

  10/25/09 | Report as spam

  I meant "Brett" not "Allan" in #3 above, sorry

  Sorry Allan...I meant Brett in #3 above.
  
  

•  
  112

  DougDiggerEberhardt

  10/25/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett, in #4 above, I meant "socratic," not Socrates. I need to proofread these....sorry. Socratic method is where you never give an answer but just ask another question and with this technique you lead the person to the conclusion you want them to come to, but they think they do it on their own and thus will buy from you (or in this case could possibly convince Allan to your line of thinking). At least it could allow the conversation to be more pleasant and get to the heart of disagreements/objections more easily so they can be overcome.
  
  Just something to think about...
  
  Doug

•  
  113

  Allan Roth

  10/26/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Allan Roth
  "At any point, did you communicate to me as to whether I had an insurable need?"
  
  Brett Anderson
  That is not a factor in choosing to invest money in this product - it is incidental - the life insurance chassis is just the means to an end which is a way to earn 'market' returns without market risk.
  
  Benjamin Roth, Actuary & Director, Life Products, Minnesota Life
  "I do not recommend this product for someone that does not have an insurable need."
  

•  
  114

  roccycwpp

  10/26/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Stop with the quotes of Ben Roth on insurable interest.
  
  It's a P.C. comment by someone looking to appease a compliance dept.
  
  It's nearly impossible to fail the insurable interest test when you buy life insurance on yourself with your own money (vs. borrowed funds from an interested outside lender).
  
  MN life should know better than most that those failing the insurable interest test are those who are pushing STOLI sales.
  

•  
  115

  Dylan R

  10/27/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  "It's a P.C. comment by someone looking to appease a
  compliance dept."
  
  Here is an example of Socratic reasoning:
  
  Why is there a compliance department and why would they
  need to be appeased? If left unchecked, might some
  producers be inclined to ignore or favorably misinterpret
  certain requirements that may be otherwise be seen as an
  obstacle to a potential sale? Is the insurable interest
  requirement a potential obstacle to a sale?

•  
  116

  glendavenport

  10/27/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Brett and Alan,
  
  Thank you both for your engaging discussion. Three thing appear perfectly clear to me.
  
  1. The average investor needs some help to improve performance.
  
  2. Insurance products can improve that performance.
  
  3. The best way for the average investor to receive the best performance is to avoid the high cost of insurance, or any other high cost products, and build a low cost andwell diversified portfolio.

•  
  117

  hikinganimal

  10/27/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Compliance has been in place as long as I can remember in the Insurance Industry...this is to keep everybody honest...Insurance is a very highly regulated industry. Too bad banks did not have similar regulations last year or so....perhaps we would not have seen all the failures, and also maybe certain governmental agencies would not have pressured lenders to make bad loans, either.
  
  If a recalcitrant prospect claims not to have in insurable interest...that would end the deal, and it would not be pursued by the agent. However, that would mean 99% if the time that the client just wasn't interested in the first place.
  
  I believe Brett made his case and proved his point. All the resulting details that have been bantered about are avoiding the contest....that you can get an 8% tax free return with no downside risk with a certain type of insurance policy.
  
  Glendavenport says "The best way for the average investor to receive the best performance is to avoid the high cost of insurance, or any other high cost products, and build a low cost and well diversified portfolio. the best performance"
  
  I ask then, how is this high cost with an IUL....you put in $50,000 over time, or $500,000 over time....you should get, on that money, a return of 8% plus have a death benefit in addition (added value). That is good investing. But yes, divest your money in other investments too, for balance.

•  
  118

  glendavenport

  10/27/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikinganimal,
  
  I said the "best return" so if the markets do 10 to 12 percent and the insurance product does 8 percent the question is is that acceptable?
  
  Over a 20 to 30 year period one could easily safely miss half of the total return available net of taxes.
  
  So insted of $50,000 or $500,000 how about $100,000 or $1,000,000.
  
  Best return for the investor or share with the insurance company in exchange for "added value".

•  
  119

  glendavenport

  10/27/09 | Report as spam

  The odd similarities between Alan And Brett

  Both Alan and Brett are Smart.
  
  Alan is smart enough to keep his money ($100,000) in his pocket.
  
  Brett is smart enough to fill his pockets with his clients money.
  
  I congradulate both of you!
  
  The pertinent question is how smart is everone else?

•  
  120

  AztecTheRed

  10/27/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi glendavenport,
  
  I said the "best return" so if the markets do 10 to 12 percent and the insurance product does 8 percent the question is is that acceptable?
  Over a 20 to 30 year period one could easily safely miss half of the total return available net of taxes.
  
  Ya see, the problem is the lowest longterm average (20 year minimum) return in the EIUL product is north of 8%
  
  NONE of the unhedged indices (INCLUDING reinvested dividends) beat that on the same timeframes.
  
  The old stockbroker's saw of "ya gotta be IN the game to get the homeruns" turns out to simply be so much risk hucksterism for commission & management fee capture.

•  
  121

  hikinganimal

  10/28/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  glendavenport
  
  Apparently you have not read the many posts on this subject here. If the markets did 10 to 12 percent, you would make 10 to 12 percent with the insurance product....the IUL
  
  Making "more money" with stocks etc. comes with it higher costs and higher risk. Should you make 20% you would beat the IUL (caps at 12% to 15%) but chances are you would have paid a lot of commissions and management fees plus you would have a pile of taxable gains.
  
  Active stock trading can be fun, but it can be devastating, too. The IUL affords comfort as you don't play the game, and you know your average of 8% or more over the years will not be taxed.
  

•  
  122

  roccycwpp

  10/28/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Please do not forget when the market tanks 50%+ like his has recently, you get those returns in much of a "balanced" portfolio.
  
  In the EIUL, the return is zero. There are insurance costs, but the benefit is in the EIUL you don't have the same recovery issues.
  
  When the market goes down 50%, you need to get 100% return to get back to even.
  
  Also, enough with the insurable interest question. It's a non-issue.
  
  And one more time, this is not an all or nothing discusssion. it's about asset allocation.

•  
  123

  DougDiggerEberhardt

  10/28/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Couple clarifications here in the quest for truth:
  
  hikinganimal said;
  
  "Making "more money" with stocks etc. comes with it higher costs and higher risk. Should you make 20% you would beat the IUL (caps at 12% to 15%) but chances are you would have paid a lot of commissions and management fees plus you would have a pile of taxable gains."
  
  "If" one were to achieve these 20% returns in the future, could they not avoid paying taxes on the gains by gifting the funds by setting up a Charitable Remainder Trust (not with Mutual Funds)?
  
  hikinganimal said;
  
  "The IUL affords comfort as you don't play the game, and you know your average of 8% or more over the years will not be taxed."
  
  Wouldn't the explanation of this in insurance industry compliant literature read "may" not be taxed?
  
  Also, again, I challenge the premise that the S&P would earn 8% on average moving forward when dividends represent only 2% today and capital growth has historically averaged 4%. The numbers don't add up do they?
  
  roccy said;
  
  "In the EIUL, the return is zero. There are insurance costs, but the benefit is in the EIUL you don't have the same recovery issues.
  
  When the market goes down 50%, you need to get 100% return to get back to even."
  
  Couple issues here...
  
  One is the assumption that I would achieve 100% of that 50% fall in the market. Many investors were aware of what was happening in the sub-prime debacle and got out of the market. While timing the market hasn't been historically recommended, there are many advisors today who criticize this buy and hold mentality, including Aztec's buddy Mish.
  
  With the EIUL, the client would have but two places to put their money if they were able to correctly predict the market decline in advance. One would be leave it where it is and earn zero percent and the other would be in a guaranteed account earning a minimum of 3%.
  
  Unfortunately, the guaranteed account in most cases only allows the client a once a year change and they would have lost all of the market rebound in 2009. There's no ability for the client to switch back and forth right? This lack of control is obviously an issue for some.
  
  Lastly, no answers on comment 110 #2 about the Internal Revenue Code relating to potential estate tax issues as to whether the policy loan is or is not included in the estate. Interesting.
  
  I'll let you all have the last say. I'm out.
  
  

•  
  124

  hikinganimal

  10/28/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Doug
  Point well taken. The more correct language would be "MAY" not be taxed.
  
  If I read your question correctly to Roccy regarding "switching" from guarantee to market index, you are not involved in switching...it is automatic. If the market starts to rise above the 3% guarantee, you are automatically involved in that gain...up to the Cap.
  
  Regarding your comment 110 #2...
  The death benefit amount payable in event of death is reduced by any policy loans. The illustrations reflect a NET death benefit, after any loans have been paid off by the insurance company. There is another column on the ledger that you do not see, which is a higher number reflecting the gross death benefit. There is no issue with estate taxes or IRS as no loan continues to exist after death.

•  
  125

  Allan Roth

  10/28/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  The debate is simple. Look at Minnesota Life's balance sheet - it's 87% in fixed income and 13% in equity investments.
  
  The chief actuary did not have to say buying a zero coupon bond and putting the rest in low cost index funds is a similar strategy to what they do.
  
  So you have one of two options:
  
  1) Invest directly using a similar strategy.
  
  2) Buy a similar investment through the insurance company and get the return you could have received by investing directly less commissions, costs, taxes, and profits.
  
  I understand why insurance producers prefer #2. They can make it complex, but they can't change the simple economics.
  
  Insurance companies are a great place to get insurance.
  
  

•  
  126

  Dylan R

  10/29/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  "If the markets did 10 to 12 percent, you would make 10
  to 12 percent with the insurance product....the IUL"
  
  Wow, that sounds as if you're saying the caps apply to the
  holding period return, not annual or any other specified
  period. That would be impressive because there have not
  been that many multi-year periods that averaged 10%-12%
  that did not include years exceeding, 15%, 18%, or even
  20%.
  
  And when the market does 10%, I'll get some dividends if I
  own all those companies (like with a low cost, low turnover
  total market index fund). You make it sound like these
  products index to a total market, total return index and not
  just the price changes of only a few hundred of the largest
  companies.
  
  How do I determine whether statements like that are
  significantly misleading? Do you have any company
  literature that supports that EXACT claim?
  
  If these products are so great, why bend the truth at all
  when promoting them them? Why not be more careful to be
  crystal clear as to how they actually work? Don't
  misleading statements of any kind distract from any actual
  merits?

•  
  127

  DougDiggerEberhardt

  10/29/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikinganimal,
  
  Thanks for the reply....
  
  I was addressing this switching (see quote below), not the automatic credit of the S&P return that you were describing. This "switching" is only allowed once a year. If I chose to get out of the S&P return in say, November last year..., because I thought the market was going to fall further and wanted to get some "positive" returns..., not zero percent return..., and then thought the market had bottomed out in April of this year..., I couldn't switch back into the S&P side of the product in April, but would have missed all of the market rebound as I couldn't get back into the S&P side till November of this year.
  
  "NOW... as nobody has brought up so far, the Minnesota Life EIUL contracts (and indeed almost all EIUL contracts) offer the contract owner the option to switch from a "index participation" strategy to a "fixed credit" strategy at various intervals... some quarterly, some annually at anniversary. The particular contract debated here is a 5% fixed account, IIRC."
  
  This switching is only allowed once per year, correct?
  
  Regarding the estate tax on death benefits, I understand they are not "estate" or "income" taxable. To use your language, I want to see the Internal Revenue Code that says the "gross death benefit" is not "estate" taxable. I think I was specific in this request when in comment 110, #2 I asked for "Just the code please. No speculation."
  
  Again, I believe this to be a legitimate request if the client has the potential of added value that could be estate taxable (via the loans coming back into the estate - "gross death benefit") and possibly increasing the size of the estate to where it would trigger estate taxes.
  
  Could you (or insurance agent reading this) provide me with the IRC that specifically addresses the estate tax on policy loans? I can't find it. I only found code dealing with normal death benefits not being income taxable or estate taxable if no incidents of ownership. No mention of whether policy loans are brought back into the estate or not. Only case law dealing with loans being brought back into the estate for income tax (trap) purposes. The fact that there is no case law dealing with this could mean there very well be in the not too distant future "if" these loans were to be added to the estate, especially if the estate tax exemption remains at $1 million in 2011 and beyond. All else, again, is speculation, until I see the code.
  
  I don't think anyone will be able to answer this with the correct code that specifically addresses the potential of policy loans adding to the estate for estate tax purposes at death.
  
  This may seem irrelevant to some, but insurance agents are doing planning for people today that will have potential tax consequences 30 years from now. While many insurance agents will be dead and buried 30 years from now, the client is stuck with the result of their planning. Just show me what the tax code says today regarding policy loans and estate taxes and I'll be satisfied.
  
  Sorry for the long explanation, but I just wanted to be clear on what I'm requesting. Tax consequences are obviously a big part of making this kind of decision today, whether they are potential income tax traps or estate tax traps (on policy loans which I never see discussed and hence my inquiry).
  
  Thank you.

•  
  128

  AztecTheRed

  10/29/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi Allan,
  
  So you have one of two options:
  1) Invest directly using a similar strategy.
  2) Buy a similar investment through the insurance company and get the return you could have received by investing directly less commissions, costs, taxes, and profits.
  
  Only the 2nd option gives you;
  A) guaranteed returns to a known index without management risk,
  B) guarantees of principal (meaning no basis, nor annually converted gains-to-basis will be lost to the markets,)
  C) tax-free growth,
  D) tax-free harvest,
  E) net/net fees significantly below those of securities management practices
  F) guarantees backed by centuries-old companies with vettable track records.
  
  Option #1 is best for market egotists, gamblers and hobbyists.
  =====================
  
  Hi Dylan,
  
  You asked hikinganimal;
  Wow, that sounds as if you're saying the caps apply to the
  holding period return, not annual or any other specified
  period. That would be impressive because there have not
  been that many multi-year periods that averaged 10%-12%
  that did not include years exceeding, 15%, 18%, or even
  20%.
  
  The high-end caps (as well as the floors) are annual, but the strategy still outperforms the uncapped indicies due to the annual-reset features. This is to say, an initial $100,000 basis after a 20% down year remains whole at $100,000... and if the market climbs the next year by the same $20,000, an uncapped securities position would be back to ground-zero, while the EIUL would have credited upwards from its new reset starting point to end at $120,000.
  
  The annual reset feature more than outperforms the forfeiture of the top-end home-runs.
  ====================
  
  Hi DougDiggerEberhart,
  
  This switching is only allowed once per year, correct?
  
  Depends on the product, some are adjustable on anniversaries, some on quarterly anniversaries, some monthly-versaries.
  
  Again, stepping in prior to hikinganimal;
  Regarding the estate tax on death benefits, I understand they are not "estate" or "income" taxable. To use your language, I want to see the Internal Revenue Code that says the "gross death benefit" is not "estate" taxable. I think I was specific in this request when in comment 110, #2 I asked for "Just the code please. No speculation."
  
  DEATH benefits are typically estate-taxable in the estate of the owner, thus the strategic useage of ILITs to position the ownership to an alternative entity outside of the estate taxation. They are not taxable as INCOME to the owner, nor to the beneficiaries.
  
  The IRS code sections are 72(e) and 7702.
  
  Again, I believe this to be a legitimate request if the client has the potential of added value that could be estate taxable (via the loans coming back into the estate - "gross death benefit") and possibly increasing the size of the estate to where it would trigger estate taxes.
  
  The same IRS sections cover the income tax-free nature of the policy loans, which are secured by and ultimately repaid from the death benefit. Because the death benefit is income tax-free, the loans (or advance draws) from it are also tax-free.
  
  Cheers

•  
  129

  Robocop975

  10/29/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  The chief actuary did not have to say buying a zero coupon bond and putting the rest in low cost index funds is a similar strategy to what they do.
  
  I think this misstates how EIUL is typically hedged (depending upon how one defines "similar"). As I understand it, EIUL carriers don't typically invest in index fund products or in their underlying stocks. Instead and in general, they buy bond instruments to support the product guarantees and they buy call options on the relevant index to provide the additional cash value return.

•  
  130

  Allan Roth

  10/29/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi AztechTheRed,
  
  Option #1 was:
  
  "buying a zero coupon bond and putting the rest in low cost index funds is a similar strategy to what they do."
  
  Thus, option #1 has far lower fees (20x lower) than option 2. It also has a stronger guarantee backed by the US government rather than an insurance company and the index fund does follow an index and give the total return which includes dividends. Finally, when you place the bond in an IRA and equities in your taxable account, you have far more tax efficiency than option 2.
  
  I continue to appreciate your comments.

•  
  131

  roccycwpp

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Allan,
  
  I'm still waiting for you to e-mail me so I can send you a copy of my new book so you can better educate yourself on EIUL. Based on this blog, you certainly need it.
  
  roccy@thewpi.org.

•  
  132

  DougDiggerEberhardt

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Aztec da Red,
  
  I would prefer to see your reply with this language concerning the estate taxation of loans:
  
  "The same IRS sections cover the income tax-free nature of the policy loans, which are secured by and ultimately repaid from the death benefit. Because the death benefit is income tax-free, the loans (or advance draws) from it are also estate tax-free upon the death of the insured assuming the death benefit doesn't push the estate over estate taxable limits at time of death."
  
  In writing and also attached to policy please (ha). That (to me) would be full disclosure.
  
  72e and 7702 didn't mention "estate" tax specifically. But I understand the "death benefit" is normally income and estate tax free if the estate is under the estate taxable limits at time of death.
  
  I'm just a strange cat that likes to see it in writing. Was taught at young age to pay attention to the details..and the language.
  
  Cheers!
  
  Doug

•  
  133

  Dylan R

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  "The annual reset feature more than outperforms the
  forfeiture of the top-end home-runs."
  
  Aztec, are you really claiming that credits in down markets
  will more than make up opportunity cost in up markets? If
  it's really as simple as you argue, I wonder why anyone
  would invest directly in the market at all? I also wonder
  how an insurance company could afford to take no loses,
  yet invest their own money to pay out enough up side to
  result in a net outperformance of the markets, give that to
  customers, and still turn a profit. Or maybe you misspoke.

•  
  134

  Robocop975

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Aztec, are you really claiming that credits in down markets will more than make up opportunity cost in up markets?
  
  I can only speak for myself, but I think the only rational position in this regard is to admit that we simply can't know how it will work out. Based upon back-testing, in some scenarios the market will "win" and in others a cap (whatever it is) on gains but with protection against losses will win. The folks at American Funds published an interesting piece on this "arithmetic of loss" focusing on retirement distribution. We also can't know how caps and costs will change over time -- there's an inherent "trust me" factor that can impact results pretty significantly.
  
  If it's really as simple as you argue, I wonder why anyone
  would invest directly in the market at all?
  
  Exactly.
  
  I also wonder how an insurance company could afford to take no loses, yet invest their own money to pay out enough up side to result in a net outperformance of the markets, give that to customers, and still turn a profit.
  
  That's actually easy to answer. Contrary to Allan's suggestion (and as I noted above), insurance carriers don't typically invest in the underlying index directly -- they hedge this exposure via the purchase of call options. If those options are excercised "in the money," the proceeds can be used to meet the policy obligations; otherwise they expire worthless (no losses). Individuals could undertake a similar strategy, but most are ill-equipped to become options traders and to get the best pricing.

•  
  135

  Robocop975

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  To clarify the last part of my previous post (#134), I didn't mean to suggest that beating the market via that strategy, providing the other policy benefits and still turning a profit is easy (even though doing so is possible, depending largely upon how the options are priced over time). What's easy to explain is the strategy carriers use to try to get that result.

•  
  136

  glendavenport

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hikinganimal,
  
  From 1972 through 2008 a 40/60 diversified portfolio did 10% exactcly, and if we subtract 1/2 of a percent for fees the net was 9.5 % per year on average.
  
  Net of fees, commisions, and lack of dividends what would be the reurn of the IUL?

•  
  137

  glendavenport

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Buy the way let me add that a $100,000 dolloar investment would be worth $2,872,912.57
  
  With the 1/2 percent fee a 60/40 portfolio would be worth $4,021,650.14
  
  Could you break out the net results for the IUL?
  
  LET GET TO THE BOTTOM LINE!

•  
  138

  AztecTheRed

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi Dylan,
  
  Aztec, are you really claiming that credits in down markets will more than make up opportunity cost in up markets?
  
  NO... read the followng carefully, as you haven't followed along so far.
  
  EIULs (so far, anyway) are not designed with a short-side credit. In other words, they do not earn more than their floor guarantees on an annual market that closes below that floor, regardless haw far below that floor it drops.
  
  The massive advantage is this;
  AFTER the market prints its annual drop, the EIUL strategy then IMMEDIATELY BEGINS CREDITING AGAIN on all upward gains FROM THE CLOSING LOW. In other words, unlike unstructured securities trading, the principal is not only not lost on the way down, but does not have to wait until returning to its previous "high-water" level in order to begin growth.
  
  The EIUL grows from its annual low closing print, even if its own principal did not DROP to that low.
  
  
  If it's really as simple as you argue, I wonder why anyone would invest directly in the market at all?
  
  Seriously? You think common sense is really a driving force for financial logic? Have you heard about states' lotteries, and the volume they run? Have you looked at congress?
  
  The old attempt to discredit by saying "if it weas really that good everyone would do it" falls on its face far more than it stands, unfortunately.
  
  I also wonder how an insurance company could afford to take no loses, yet invest their own money to pay out enough up side to result in a net outperformance of the markets, give that to customers, and still turn a profit. Or maybe you misspoke
  
  I did not mispeak (err, type ;~) Insurance companies (oddly enough) operate more efficiently in trading because they are forced to maintain legal reserves sufficient to fulfill all specified obligations... and, ironically, this "albatross around their neck" forces them to trade within their means, and thus much more effectively over time, than operations that are allowed to overleverage and under-reserve.
  
  By the way, insurance companies themselves DO NOT "take no losses"... rather, they have the money management (albeit by regulatory requirement) that allows them to absorb calculated losses without collapsing... unlike our commercial & investment banking systems.
  
  ============================
  
  Hi Robocop.
  
  We also can't know how caps and costs will change over time -- there's an inherent "trust me" factor that can impact results pretty significantly.
  
  THIS is definitely the key "risk" to be focused on. The rest of the math (when you actually understand it) makes the capped and ratcheting strategy outperform consistently as long as the upside caps, the floor, and the carrying expenses don't adjust adversely to the competitive alternative of the unprotected market participations.
  
  I expect that should the insurance industry find themselves painted into a scenario where they cannot design the caps & expenses to competitively outperform the unprotected alternatives, they won't be able to sell the plans and they'll shift to some other structure (much as whole life has been quickly becoming obsolesced by the universal chassis.)
  ============================
  
  Hi glendavenport,
  
  From 1972 through 2008 a 40/60 diversified portfolio did 10% exactcly, and if we subtract 1/2 of a percent for fees the net was 9.5 % per year on average.
  
  Let's add a net of 30% combined state & federal taxes (and I think that would be conservative, considering the annual nibbles removed from the compounding potentials.)
  
  That would take your strategy down to around 6.65%, net/net.
  
  
  Net of fees, commisions, and lack of dividends what would be the reurn of the IUL?
  
  With a 0% floor, and a 15% cap, I can tell you what 1984 through 2008 would have delivered; 8.81% net of all but costs of insurance.
  
  The 25 average annual COI on a non-smoker male, from 45-70 years of age, would be right around 100 basis points given a max-funded policy within the tamra, tefra & defra corridor... bringing our net/net to around 7 3/4%-ish.
  
  Further, the EIUL would incur no timing risks of being underwater when needed.
  
  THAT is the bottom line.
  
  Cheers,
  Aztec

•  
  139

  Robocop975

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Could you break out the net results for the IUL?
  
  It's impossible to do without making a variety of assumptions. By my math, a 60/40 portfolio (S&P/aggregate bond) has a 39-year average annual return of about 9.4%, which is very close to the return of the S&P 500 alone over that period (about 9.7%). Thus blending stocks and bonds maintained most of the performance of stocks while lowering the risk. The portfolio effect (that is, the synergistic result of diversification) is clear. Of course, backtesting is inherently problematic since, as the commercials say, past performance is not indicative of future results. There is simply no way to know what the future will hold and how -- if at all! -- future results will correlate with past results.
  
  That said, here are 20-year S&P returns without dividends:
  
  2008 -38.49%
  2007 3.53%
  2006 13.62%
  2005 3.00%
  2004 8.99%
  2003 26.38%
  2002 -23.37%
  2001 -13.04%
  2000 -10.14%
  1999 19.53%
  1998 26.67%
  1997 31.01%
  1996 20.26%
  1995 34.11%
  1994 -1.54%
  1993 7.06%
  1992 4.46%
  1991 26.31%
  1990 -6.56%
  1989 27.25%
  
  By my math, the total return for that period (including dividends) averaged 10.36% annually. I took my data from S&P's website here, so you can make sure my math is right throughout (I did it by hand and may well have screwed up).
  
  If the negative return years are eliminated, a 1% minimum guarantee assumed and a cap of 14% assumed, I get an average annual return is 7.93%. You also get the benefit of the life insurance. Subtract a 100-125bp cost of benefits and you have a decent idea of how the concept works. That said, capital gains taxes on the 60/40 portfolio will reduce the return on that money pretty significantly overall, whatever rates are assumed. And, of course, looking at other time periods will lead to *very* different results (for example, the S&P looks lousy over the past 10 years -- obviously -- while the EUIL approach would benefit from the loss protection/minimum guarantee).
  
  I don't know if you think the EIUL approach would be a good one for you, but these rough numbers are a reasonable place to start looking at it.

•  
  140

  Robocop975

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  With a 0% floor, and a 15% cap, I can tell you what 1984 through 2008 would have delivered; 8.81% net of all but costs of insurance.
  
  Using those assumptions over the 20-year period I used above (1988-2008), I get 8.03% (before insurance costs) v. 10.36% TRR for the S&P (before taxes).
  
  The rest of the math (when you actually understand it) makes the capped and ratcheting strategy outperform consistently as long as the upside caps, the floor, and the carrying expenses don't adjust adversely to the competitive alternative of the unprotected market participations.
  
  I agree that it's a good strategy for some, but I also think your overall view isn't skeptical enough. We simply don't know what the future will bring. For example, a long-term bull market (though I don't expect one) wouldn't likely help the EUIL concept v. stocks or a 60/40 portfolio (unless bond performance were ugly) and a long period of spotty market performance would suggest using a higher participation rate (say 140%) lower cap (say 12%) product. Moreover, one thing Allan is right about is that higher fees are much more damaging to performance than is commonly thought.
  

•  
  141

  glendavenport

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Aztec,
  
  You made the following point: Let's add a net of 30% combined state & federal taxes (and I think that would be conservative, considering the annual nibbles removed from the compounding potentials.)
  
  There is no reason to add that tax to a passive portfolio. Most of the gains are capital appreciation and the taxes on the realixed capital gains have been lower.
  
  Additionally most people can use a 401k or IRA to defer a portion or even all the taxes.
  
  With 8.81%, perhaps it is closer, but even net of the insurance cost a balanced portfolio is the clear winner .......bottom line.
  
  I am curious as to what the taxes and or interest arrangements are on the IUL? How do you get this 8.81% gain in your pocket tax free and is it in fact interest free?
  
  Perhaps you would explain that.
  
  

•  
  142

  Allan Roth

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Robocop975
  
  Note the difference in the comments from AztecTheRed and you. AztecTheRed clearly disagrees with me and gives facts and logic. On the other hand, you:
  
  1) Reference a book you hadn't read that didn't even cover the subject you claimed.
  
  2) You claim the statement from the Minnesota Chief Actuary (comment 129), made on a call you weren't a part of, was wrong.
  
  These are just examples.
  
  You claim you don't sell these but this may be as accurate as other things you stated as facts. I don't think you are helping your cause by making up facts to try disprove arithmetic.
  
  Take a look from some of the comments from AztecTheRed. None of us are your fact checker.

•  
  143

  Robocop975

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  With 8.81%, perhaps it is closer, but even net of the insurance cost a balanced portfolio is the clear winner .......bottom line.
  
  Looking at the problem this way is very dangerous in my view. Keep reminding yourself that past performance is not indicative of future results (read Taleb's The Black Swan for more). As I noted above, the EUIL approach is the clear winner over the past ten years. We simply can't know what the future will bring. For that reason, I generally think that the EUIL approach can be problematic for the average investor. For the EUIL strategy to work, the cash inside the policy needs to keep working for a significant period of time (that's why it's typically designed to provide future retirement income). If the insured needs the money prematurely (fairly plausible for the average Joe), the plan get screwed up -- and screwing it up means a lot of money (policy costs, for example) gets wasted.

•  
  144

  Robocop975

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  You claim the statement from the Minnesota Chief Actuary (comment 129), made on a call you weren't a part of, was wrong.
  
  Abraham Lincoln famously opined that it's better to remain silent and thought a fool than to speak up and remove all doubt. Allan, you might have heeded that advice.
  
  I have no idea how ML hedges its EUIL and never claimed otherwise. However, I have spoken with actuaries from a number of carriers and been told that EUIL is hedged using options. Moreover, the literature in the area discloses the same thing. For example, as stated by Iowa's Commissioner of Insurance (link): "Insurance companies typically purchase call options to hedge the growth in interest credited to the policy as a direct result of changes in the related indices." Therefore, even though I suspect that you misunderstood the ML rep, I gave you the benefit of the doubt and spoke of what's done "typically."
  
  None of us are your fact checker.
  
  At least you're predictable, Allan (sigh -- predictably ignorant). Pot; kettle; introductions.

•  
  145

  AztecTheRed

  10/30/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi Glendavenport,
  
  There is no reason to add that tax to a passive portfolio. Most of the gains are capital appreciation and the taxes on the realixed capital gains have been lower.
  Additionally most people can use a 401k or IRA to defer a portion or even all the taxes.
  
  A) few people have, or can quickly enough build, as much funding into their 401(k) or traditional IRA as they desire... relative to the fundability of an EIUL policy with extremely higher funding limits (which are basically only restricted by underwriting's willingness to find sufficient insurable interest... ahh yes, back to this huckleberry ;~) This time, however, we're talking about the upper end, not the theoretical possibility of a lack thereof.
  
  B) Further, color me *EXTREMELY* skeptical of even the most BRILLIANT of crystal-ball market magicians to effectively pre-design a "passive" long-term strategy so well it has little to no down years EVER, as is one of the most critical features of EIUL strategies.
  
  C) If more active trading is required to ensure principal security from long-term market volatility, the theoretical "passive tax avoidance" goes out the window.
  
  
  With 8.81%, perhaps it is closer, but even net of the insurance cost a balanced portfolio is the clear winner .......bottom line.
  
  I've yet to see this evidenced in any historical reality, given the costs and taxation of rebalancing.
  
  Its fine for the "home-run hitter" portion of a younger person's aggressive portfolio (which, frankly, is critical to be in place in heavier abundance at earlier stages...) but not for the longterm, IMO.
  
  I am curious as to what the taxes and or interest arrangements are on the IUL? How do you get this 8.81% gain in your pocket tax free and is it in fact interest free?
  
  Pal... respectfully... scroll up to the top & read downward post-by-post. This has all been detailed out.
  
  
  There are really two ways EIUL could be a bad choice for longterm safe growth portions of a personal plan;
  
  A) The market over the longterm averages greater than the EIUL upper cap *AND* does not drop below the EIUL floor (about as likely as the tooth faerie,)
  or
  B) The carrier that backs the EIUL selected goes belly up, or skews the variables (as they retain the contractually agreed tolerance to do) beyond where the account can outperform the unprotected markets (which, given the litigation pressures against such, they are unlikely to do *UNLESS* the derivatives market itself forces them to do so... in which case, any unprotected securities positions will be decimated or in dire straights anyway.)
  
  IN THE END... its still not like EIUL strategies are double digits better than unprotected actively managed accounts... or even high single digits better. I'll entertain the argument that in come cases they're ultimately neck-and-neck in longterm returns.
  
  The *major* kickers in favor of EIUL strategies for the general public are;
  A) it is simpler to understand & trust the account offer,
  B) there is a deeper historical base to give trust to with century-old guarantors with vettable records that far back,
  C) there is a far more stable track record to the insurance industry than the banking & securities industries,
  D) the fees, at their face, are exponentially less (and though this is irrelevant when the end result is the same, it matters to Johnny Public,)
  E) The tax benefits are much simpler to understand (and for advisors to explain,)
  F) There is a huge base of existing account owners (including congress-critters,) which establishes a virtually immovable level of stability of legislation.
  
  I still believe that more aggressive & direct strategies have their place... but they're at the peak of the risk pyramid, not the body or base.
  
  Cheers,
  Aztec

•  
  146

  roccycwpp

  10/31/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  If you'd like to stop your unscientific comparisons, e-mail me. We can do a go to meeting and I'll use my proprietary online software to compare active or passive investing to CVL.
  
  You can put in whatever variables you want for the comparison to see which won wins.
  
  However, these discussions about which one wins is not what it should be all about. Remember this is not an all or nothing discussion.
  
  People can have money in stocks, mutual funds, and use CVL as a wealth building tool as well.
  
  I also suggest you read the Dalbar study if you want to start posting good information for those reading this blog. While it's nice to talk about buy and hold, the statistics clearly show that the average mutual fund is held for less than five years and closer to three years in a volatile envoronment (bond stats are similar)

•  
  147

  Allan Roth

  10/31/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  roccycwpp,
  
  Just sent you my address -very easy to find.
  
  The Dalbar study grossly overstated the difference between dollar weighted and time weighted returns. It his huge, however, at about 1.5% according to my study and triangulating with others.
  
  Hope you don't mind me asking a question to you and AztecTheRed. It has to do with this comment from me and the response from Robocop975, after I called him on a couple of false facts he stated:
  
  Allan: None of us are your fact checker.
  
  Robocop975: At least you're predictable, Allan (sigh -- predictably ignorant). Pot; kettle; introductions.
  
  I have many incidences when I called insurance producers on facts and the response always seems to include calling me "ignorant." Is there some insurance manual that recommends this tactic and that word? It's almost always the word "ignorant."
  
  Thanks.

•  
  148

  Robocop975

  10/31/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  It has to do with this comment from me and the response from Robocop975, after I called him on a couple of false facts....
  
  Good morning, Allan. Actually, I'm giving you the benefit of the doubt by alleging ignorance. On just the prior example I demonstrated your error (unless you're claiming that the Iowa Commissioner of Insurance is lying) and you simply move on as if nothing happened. That's either willful ignorance or dishonesty.
  
  You also keep wrongly assuming and claiming that I sell insurance. Once again you jump to your preferred and assumed conclusion without understanding the facts. I do have my insurance license; securities license too; and a number of industry designations. But I don't sell -- I'm an attorney and Compliance Director.

•  
  149

  roccycwpp

  11/01/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  hmm. Apparently anything that doesn't further you goal that the only way to build wealth is through your preferred platform does is not good, does not have correct math, is grossly over or understated, etc.
  
  There are many ways to build wealth and using a properly designed EIUL is one of them. It is a mathematical fact that EUIL under several fact patterns will outperform other ways to build wealth and as such it should not be shunned by those who only think a way to build wealth is through a properly balanced portfolio.
  
  As for your continued harping on people calling you ignorant which you seem to take as a sign that the people calling you that have no facts to back up their position, I can't help but snicker at that. When you put forth some examples and facts on this blog that lead me to believe that you are not "ignorant" on some of the things you?re pontificating about, then I'll refrain from calling you ignorant on certain issues.
  
  In case anyone cares, the following is one definition of ignorant which I think accurately reflects my opinion on many of the people who are using this blog.
  
  Ignorant--lacking knowledge or comprehension of the thing specified
  
  And for the record, I'm ignorant as we all are ignorant on many issues. EIUL and building wealth just doesn't happen to be one of those issues.

•  
  150

  Allan Roth

  11/01/09 | Report as spam

  The Role of a compliance department

  Post #148 by Robocop 975 contains a critical learning, in my view. He or she finally discloses they are a "compliance director."
  
  In this comment, Robo (for short) refers to the following link to prove I'm practicing "willful ignorance or dishonesty."
  
  http://www.iid.state.ia.us/docs/bull0818.pdf
  
  In actuality, this link is to an Iowa bulletin on "Accounting for Derivative Instruments" and has nothing to do with me calling this "compliance director" on stating false facts.
  
  The learning here is that, whether we are talking about the insurance or the securities industry, never forget the fact that the compliance department exists to protect the company from the consumer.
  
  Many false statements are made by brokers and insurance producers but proving you relied on those statements is an uphill battle.
  
  Compliance departments teach their producers either not to put things in writing or not to do so in a way that can be traced.
  

•  
  151

  Allan Roth

  11/01/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Roccywpp
  
  Why would you think I'd have any disincentive to recommend investing through insurance product? You stated:
  
  "hmm. Apparently anything that doesn't further you goal that the only way to build wealth is through your preferred platform does is not good, does not have correct math, is grossly over or understated, etc."
  
  Did you look up my platform or did you make the statement "lacking knowledge or comprehension of the thing specified?"
  
  

•  
  152

  Robocop975

  11/01/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Per his usual script, Allan (in #150) makes a claim but fails to back it up. For those scoring at home, let's recap.
  
  In post #125, Allan said the following:
  
  "The chief actuary [of Minnesota Life] did not have to say buying a zero coupon bond and putting the rest in low cost index funds is a similar strategy to what they do."
  
  Allan then suggested that employing a similar strategy makes more sense than using EUIL to create wealth.
  
  I replied in #129 with respect to how EUIL is hedged:
  
  "I think this misstates how EIUL is typically hedged (depending upon how one defines 'similar'). As I understand it, EIUL carriers don't typically invest in index fund products or in their underlying stocks. Instead and in general, they buy bond instruments to support the product guarantees and they buy call options on the relevant index to provide the additional cash value return."
  
  In #142, Allan attacked me as follows, saying I was "making up facts to try [sic] disprove arithmetic":
  
  "You claim the statement from the Minnesota Chief Actuary (comment 129), made on a call you weren't a part of, was wrong."
  
  As I pointed out in #144, it was Allan who was in error:
  
  "I have no idea how ML [Minnesota Life] hedges its EUIL and never claimed otherwise. However, I have spoken with actuaries from a number of carriers and been told that EUIL is hedged using options. Moreover, the literature in the area discloses the same thing. For example, as stated by Iowa's Commissioner of Insurance (link): 'Insurance companies typically purchase call options to hedge the growth in interest credited to the policy as a direct result of changes in the related indices.' Therefore, even though I suspect that you misunderstood the ML rep, I gave you the benefit of the doubt and spoke of what's done 'typically.'"
  
  In #147, Allan ignored the issue except to try to put me in a bad light (again). In #150, Allan returned to the issue to declare that "this link is to an Iowa bulletin on 'Accounting for Derivative Instruments' and has nothing to do with me calling this 'compliance director' on stating false facts." Of course, his bald-faced denial is both unsupported and unanalyzed -- because it can't be supported by the underlying <ocument. As the Iowa Commissioner of Insurance clearly states, conclusively demonstrating that I am correct and Allanis in error about how EUIL is typically hedged:
  
  "Insurance companies typically purchase call options to hedge the growth in interest credited to the policy as a direct result of changes in the related indices."
  
  Not surprisingly, Allan attempts misdirection relating to compliance officers because his own errors are so obvious, damaging his credibility (such as it is) even further. To summarize, it is 100% clear that EUIL is typically hedged through the use of call options and not, as Allan claims, by investing in the underlying index -- exactly as I have stated repeatedly.
  
  I expect Allan to reply with his usual unsupported bluster, but the facts are clear and speak for themselves. All one need do is read the thread.

•  
  153

  Allan Roth

  11/01/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  The two (of many) false statements from Robo were that:
  
  1) Reference a book you hadn't read that didn't even cover the subject you claimed.
  
  2) You claim the statement from the Minnesota Chief Actuary (comment 129), made on a call you weren't a part of, was wrong.
  
  I have worked with many compliance officers to get compensation for clients that have been duped by their firm. Robocop975 is very good.
  
  It would be great if he identified himself - compliance departments love 473 page documents that a consumer (or even the producer) can't understand but he doesn't like real disclosure.
  

•  
  154

  Robocop975

  11/02/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  The two (of many) false statements from Robo were?.
  
  So Allan keeps claiming. Let?s see if he's telling the truth.
  
  1) Reference a book you hadn't read that didn't even cover the subject you claimed.
  
  Allan is talking about another thread here ? one in which he claimed that income annuities (the kind of annuity that pays a guaranteed income for life) are ?oversold.? Unfortunately for Allan and his position, the academic world has looked at the question in great detail and thinks Allan?s viewpoint is ? essentially ? nuts. Of course, academics are far more unbiased and impartial than people like Allan, who have books and services to pitch.
  
  Income annuities (whether an immediate annuity or the annuitization of a deferred annuity) are an incredibly powerful tool for managing income needs and are almost surely the most underutilized financial asset in the market today. As reported by The Wall Street Journal, "income annuities can assure retirees of an income stream for life at a cost as much as 40% less than a traditional stock, bond and cash mix."
  
  From Prof. David Babbel of Wharton:
  
  "I have reviewed over 70 academic studies that have appeared since 1999, analyzing lifetime income annuities vs. other alternatives, and coauthored another major study. (Most of these are included in the reference section to this paper, as well as a handful of earlier academic studies, each marked with an asterisk.) The consensus of the literature from professional economists is that lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people. How great a role depends on a number of factors, but it is fair to say that for most people, lifetime income annuities should comprise from 40% to 80% of their retirement assets under current pricing. Generally speaking, if a person has no bequest motive, or is averse to high risk, the portion of wealth allocated to annuities should be at the higher end of this range.
  
  "Lifetime income annuities may not be the perfect financial instrument for retirement, but when compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, where risks and returns are carefully balanced, they dominate anything else for most situations. When supplemented with fixed income investments and equities, it is the best way we have now to provide for retirement. There is no other way to do this without spending much more money, or incurring a whole lot more risk coupled with some very good luck."
  
  Lifetime Income for Women: A Financial Economist?s Perspective
  
  Here are some great academic resources on the value of income annuities:
  
  Annuities and Individual Welfare
  Investing your Lump Sum at Retirement
  Rational Decumulation
  Optimal Gradual Annuitization: Quantifying the Costs of Switching to Annuities
  Optimizing the Retirement Portfolio: Asset Allocation, Annuitization, and Risk Aversion
  
  So Allan failed with his number 1; let?s move on to number 2.
  
  2) You claim the statement from the Minnesota Chief Actuary (comment 129), made on a call you weren't a part of, was wrong.
  
  I have already responded to this nonsense in detail with post #152 above. As I predicted, Allan ignores the facts of the matter (the link from the Iowa Commissioner of Insurance proves that Allan is wrong) and attempts a misdirection. What a shock.
  
  The bottom line is that no matter how much braying Allan does and no matter how aggressively he tries to change the subject, income annuities still make great sense for most retirees and EUIL is still hedged through the use of call options.
  

•  
  155

  Allan Roth

  11/02/09 | Report as spam

  Disclosure

  Robocop975,
  
  Why does a director of compliance not want to disclose their identity? Isn't compliance suppose to be about disclosure?
  
  You have an amazing skill of arguing points that have nothing to do with you quoting a book you hadn't read and speaking for a chief actuary in a call you weren't a part of.
  
  
  
  

•  
  156

  Brett A

  11/03/09 | Report as spam

  Gains in Low Markets & Other Loose Ends

  I guess I should take it as a compliment when the only way Roccy can refute what I stated is to call me a *****. Because as they say, only small minds resort to small words as a last resort. If anyone is a company ***** you would think he would be glad to claim the title as he enlists agents primarily for the IUL plan he prefers (LSW), but he is not even honest enough to disclose who it is on his site by always referring to it by a slogan on their illustrations - Revolutionary Life. He keeps throwing out a red herring about how to compare policies which is a low Illustration Rate. But anyone who truly understands how IUL work knows that not one penny has ever been credited to a single IUL policy because of Illustration Rates -- gains are credited solely on the basis of the cap and participation rate formula less costs for each crediting period. He keeps talking about how they will perform in a low index gain environment, so lets take a look at how each would of performed over the actual recent worst 10 year periods using actual index gains for 1974 to 1983. The hypothetical IUL gains are for each plan-s 140% participation rate and current renewal cap. As you can see the average 10 year gain credited to the Minnesota Life plan would have been 30% more! But we cannot forget the expenses - they would have been more for the LSW Provider plan:
  
  S&P Minn. LSW
  Actual 14% 10%
  
  1983 5.06% 7.41% 5.56
  1982 1.40% 6.16% 4.71
  1981 2.86% 6.91% 5.31
  1980 3.87% 7.59% 5.80
  1979 1.34% 6.51% 5.03
  
  Past 5 Yrs 2.91% 6.92% 5.28
  
  1978 0.11% 5.67% 4.31
  1977 0.87% 6.25% 4.77
  1976 2.90% 7.24% 5.56
  1975 0.48% 6.02% 4.71
  1974 - 0.31% 5.95% 4.80
  
  Past 10 Yrs 1.86% 6.57% 5.05
  
  10 Yr Costs:
  Age 40 na - +12.6%
  Age 50 na - +35.6%
  
  First, for you skeptics you can see that the Minn. IUL has an average gain of 253% more than the actual S&P. This is because it earned gains during the recovery on top of the gains it KEPT - instead of just recovering. Do you have anything that could do the same? With no market downside risk?
  
  Next, what about the 1.25% bonus that LSW MAY pay that he claims will mean it will perform best long term? First it starts AFTER year 10. It is NOT guaranteed - it is NOT even in the policy as a potential credit (whereas all annual cap and participation rate parts by Minnesota ARE and guaranteed each year as declared). Even if you added 1.25% to LSW it would not match Minn. But this is NOT how this bonus might work. Here is what it says in the brochure:
  
  "Starting at the end of policy year ten, an anticipated 1.25% Account Value Enhancement (non guaranteed) will be credited to the policy each year. An AVERAGE of the MONTHLY accumulated values will be multiplied by 1.25% and credited to the Basic Strategy at the end of the policy year."
  
  This is what their actuary wrote to me about it: ?The total account value is stored each month and is averaged at the policy anniversary. The 1.25% is (then) applied to the averaged account value.?
  
  We all know that when you average something over long periods of time the result will only be 50% - so the maybe credit might really only be 0.625%. But lets say it is 1% - it still would be less than Minn. - and would not help at all for the returns above.
  
  LSW has a good IUL - just not this one. This plan locks you into index choices for 5 years. Their other plan does not, and the avg. 10 year gain in the above 10 year picture with a higher 12% cap would have been 5.85%, or 15.8% more than this plan with costs only 6.3% more (age 50), so it would have a net higher cash value. But no maybe bonus after 10 years. And still less than Minn. And the LSW Provider has a renewal rate for years 2-5 which is less than the first year rate - why would anyone want to lock themselves into that?! As for Minn., I used them for this challenge because - based on actual caps and costs - I do not know of a better IUL today. If you do, let me know - but so far no one has. Also, Minnesota was named by Allan in the column in the interest of full disclosure.
  
  But really, if someone is going to call you a co. ***** they at least should know what they are talking about. Especially the product they primarily promote. With each discussion Roccy proves again he really does not.
  
  As for the original, actual challenge this is what Allan stated it was in his column: an 8% return in 10 years with minimum downside risk. That is ALL. He later increased the time period on his own to 26 years. Yet despite showing that it could be done 99% of the time based on historical returns of the S&P 500 Index for the past 65 years for multiple time periods, he focused ONLY on issues that had NO relevance to the merits of the actual investment at hand. After refuting his numerous lies and mis-directions he did not deny that he had done exactly this. Only silence. This sham of a challenge is over everyone, and it is time to move on to discuss it in a forum where the moderator has at the least an honest, open mind. That cannot be found here.
  

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  157

  glendavenport

  11/03/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Aztec,
  
  Your arguments are interesting but I think argument A is the best for me. Thats because I trust the markets, and would prefer to keep control as I know what my risk are, and can embrace a passive approach at low cost with minimal taxes.
  
  No worries about an insurance company changing its crediting, no worries about the possibility of life insurance being taxed in the future, and liquidity today not having to wiat to get around surrender fees and the like.
  
  Sorry but I won't be enriching the masses of Life Insurance Salesman who offer make such passionate pleas for our money.
  
  Glen Davenport
  
  A) it is simpler to understand & trust the account offer,
  B) there is a deeper historical base to give trust to with century-old guarantors with vettable records that far back,
  C) there is a far more stable track record to the insurance industry than the banking & securities industries,
  D) the fees, at their face, are exponentially less (and though this is irrelevant when the end result is the same, it matters to Johnny Public,)
  E) The tax benefits are much simpler to understand (and for advisors to explain,)
  F) There is a huge base of existing account owners (including congress-critters,) which establishes a virtually immovable level of stability of legislation.
  

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  158

  AztecTheRed

  11/03/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi Glendavenport,
  
  Your arguments are interesting but I think argument A is the best for me.
  
  I answered 3 different questions with multipart sequential answers... there were 3 different "A" answers. Which "A" are you referring to?
  
  The "A" you reposted supports EIUL investing... but it doesn't appear that this is the supporting point you were actually shooting for.
  
  Sorry but I won't be enriching the masses of Life Insurance Salesman who offer make such passionate pleas for our money.
  
  You'll pay far more to the securities gamers to get anywhere near the same results... do you have a 'personal' issue against the insurance companies? You won't be paying less to the securities companies.
  
  My position is not only that "one size does not fit all" but that "a single solution is virtually never the best mix for a properly planned portfolio."
  
  Take the full-exposure risks on the amounts you can afford to lose, and of which you are personally competent (and sufficiently reserved) to be managing... and export the risks of loss, tax exposure, fee costs, and underperformance to suitable players for the rest.
  
  In the end, you can never prevent people from voluntarily adopting too much risk... its just human nature.
  
  "There can be no real freedom without the freedom to fail."
  Erich Fromm
  
  Cheers,
  Aztec

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  159

  glendavenport

  11/03/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Aztec,
  
  The A is:
  
  A) it is simpler to understand & trust the account offer
  
  My trust is in a portfoio that can be controlled like a balanced portfolio.
  
  As I said it frees me from any worries.
  
  The only risk one bears is the volitility risk of the markets.
  
  I can live with that.
  
  

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  160

  Dougmor

  11/07/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Wow, now I'm confused. Which EIUl should I choose? Life of The Southwest or Minnesota Life? In today's times probably the more financially sound makes the most sense.
  
  How would one purchase a boring Swiss policy with less moving parts and more sound financial responsibility behind it?
  
  

•  
  161

  AztecTheRed

  11/09/09 | Report as spam

  RE: Insurance Investing and the $100,000.00 Challenge - The Outcome

  Hi Dougmor,
  
  EIUL programs & options need to be selected *after* you define your scenario, as they may have from extremely different features between them, to subtle (but critical) differences relative to your specific financial life.
  
  There is no "generic best"... every person's fit determines which structural design is optimum.
  
  Not sure what to tell you about a "boring Swiss policy." I have no idea what you're looking for in that.
  
  Luck!
  Aztec