By Bill Boersma
Dear Policy Owner:
We’ve spent a lot of time talking about realistic returns for IUL policies. Attached you’ll find a table with numbers that are important to understand. Here’s a quick explanation of what the data illustrates.
- First, it shows the historical total S&P 500 return based on the AG49 calculations over the past 65 years; just shy of 11%.
- The second line shows the S&P 500 price return without dividends: 8.12%. We’ve discussed that the driver of your policies is exclusive of dividends, which over the past 65 years has been a significant percentage of the return.
- The next three lines show the same S&P 500 returns without dividends assuming a 0% floor and 8%, 10% and 12% caps.
- Finally, the last three lines show policy crediting assumptions with 12%, 10% and 8% caps at an 8% assumed average market return for planning purposes, rather than the historical return close to 11%
The point is, as we discussed, you’d never do your traditional retirement investment planning based on an assumption of earning 10-12% year in and year out indefinitely. It might happen, but you aren’t going to plan on it and save accordingly. Most people wouldn’t. An aggressive individual might assume 9-10% and a conservative individual might assume 5-6%. Many people would likely be comfortable with a 7-8% assumption.
Assuming the maximum IUL crediting rate, as your agent has been pushing, is like assuming an ongoing 11% market return. That’s a very aggressive assumption. When evaluating your policy, you want to plan with assumptions that are more conservative (realistic) and if you outperform them, that’s great. It’s a lot better than underperforming them and ending up behind the ball, which is more dangerous with insurance than it is with investments due to the growing policy expenses and potential policy loans.
I’ll stick by my comment that I would not pay attention to any projections greater than 5.2% we ran. These are not ridiculously conservative.
Finally, remember that all of these numbers are based on the actual historical S&P 500 and are not representative of cash values of an insurance policy. The policy cash value will be reduced by premium taxes, commissions, policy fees and mortality charges.
I’ll talk with you all day about this.
Thank you,
Bill
Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com or call at 616-456-1000.
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc., a SEC Registered Investment Advisor. OC Consulting Group and its affiliates are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.
The examples shown are based on historical market returns and are for informational purposes only. Actual policy performance will vary and may be affected by future cap rates, policy charges, and market returns. Past performance is not indicative of future results.
2For illustrative purposes only. Historical capped-return results were calculated by applying annual caps of 8%, 10%, and 12% to annual S&P 500 price returns (excluding dividends) over the period shown. These figures are hypothetical and are not actual investment results, projections, guarantees or policy illustrations.
3For illustrative purposes only. This analysis applies a proportional scaling factor of 72.86%, calculated by dividing an 8.00% assumed planning return by the 10.98% historical annualized return shown in this example. The 72.86% factor is then applied to various hypothetical capped-return scenarios to show how those outcomes would be reduced if adjusted to a more conservative 8.00% planning assumption. These figures are hypothetical and are not actual investment results, projections, guarantees, or policy illustrations.
