Recent and Historical Market Trends VS Life Insurance

The ability of brokers and financial professionals to predict future market performance is limited by a number of factors. The very short, short and moderate term investments are traditionally the most volatile (subject to fluctuation in price).

Economic conditions, even those that do not directly effect an industry, can affect prices of industry equities. Even experienced investors can still succumb to the most basic emotions and when a group of investors begin to feel the same thing it creates volatility. The emotions are, of course, fear and greed.

For individuals that have income that they are willing to preserve into the future equities can be an intimidating option. Historically stocks have outperformed just about every other investment vehicle in the very long term in the form of indices. While many individual stocks have outperformed the wildest dreams of most humans, that has been the exception rather than the rule. Many people, especially during the last decade, have seen massive growth and tremendous "paper" profits (theoretical profits made on securities positions that are still open for trading price fluctuations) deteriorate to nothing. If one is to consider life insurance as an alternative it can permit the policyholder a formidable method of wealth preservation and accumulation. Life insurance policies that are linked to the performance of equity markets, although not, strictly speaking, investment products, can still return a stable amount over time while providing a financial benefit upon the death of a policyholder that is far in excess of the amount paid to maintain the policy (premiums). This type of policy, an Equity Indexed Universal Life (EIUL) ties its cash value and the value of the death benefit to the price of a securities index. The maximum returns are "capped" but minimum returns are also set, meaning that while your policy can never outperform the markets it will also never return you interest lower than the stated rate at the inception of the policy.

At the time of this writing (07/09) the markets since the turn of the last decade (12/31/99) have shrunk appreciably. The Dow Jones Industrial Average (DJIA) has shrunk by 23% and the NASDAQ Top 100 index is down 34%. Assuming that both return to their former levels in the next 10 years one could expect a return of about 0% on their 20 year investment. Consider a hypothetical EIUL that has a minimum of 2% and a cap at 12%. As an oversimplification the policy would have returned about 20% (ignoring compound interest, which would increase returns) and if the market returned in the following 10 years averaging, let's say, a combined 30% (the amount that the DJIA would need to gain to return to its prior levels) that would produce a return of 3.0% annually in the EIUL and an indexed based fund.

Assuming a lump sum of $10000 was to be placed in interest bearing accounts with the returns mentioned above the index fund would return $150 in 20 years while the EIUL would return about $5600. These numbers are oversimplified and do not reflect any fees and most of the compounding of interest which would increase the return on the EIUL.

The above example assumes the market returns to its previous levels. If it does not then the EIUL will continue to outperform and will have the additional benefits of a small tax shelter and large benefit at the passing of the policyholder.

By Aaron Burrus