We compare two different investment scenarios—endowment and income strategy, in which IUL trades off a couple of points in market return for a much lower volatility.
Let us compare the performance of an Indexed Universal Life (IUL) policy with the S&P 500 index over the last 50 years. For this analysis, we used the annual returns of the S&P 500 (with dividends reinvested) from 1969 to 2018, and an IUL with a 5% spread index strategy (points deducted off the top of an index return). We will review two types of investment: endowment and income strategy.
Endowment strategy is one in which money is left to grow in the account for a certain period of time. A dollar invested in the S&P 500 would have grown to $107 after 50 years. Assuming a 33% tax rate, the after-tax balance would be $71, which explains the big drop at the end of the S&P 500 curve. The IUL investment would have appreciated to $55 during the same period. Since IUL investments are tax-free, there is no tax effect on the end balance. Notice how much smoother IUL curve is compared to the S&P 500. Though IUL gives up a couple of points in market return compared to the S&P 500, IUL is the big winner in volatility measure by providing a more stable pattern of return. These returns and standard deviations are quantified in the blog “IUL / FIA Credit Strategies and Capital Preservation Explained.”
Income strategy is one in which there is a constant withdrawal from the account balance during the latter part of the investment period. In our example, $15K a year is invested from year 1 to 10, money is left to grow for the next 10 years, and then an annual income of $60K is taken from year 21 to 50 (30 years). The payout is the income stream and the remaining balance at the end of 50 years. The income stream amounts to $1.8M for both investments. The after-tax end balance is $1.1M for the S&P 500, and $0.65 for the IUL. Here again, IUL trades off some performance for a lower volatility. However, taking withdrawals also marginally increases the volatility, as can be observed by comparing the two IUL curves.
An in-depth look at this income strategy is provided in our blog “How IUL Works.”
We specialize in tax-free retirement strategy and investments such as IUL, Annuity and LTC. Prefer a quick and complimentary consultation? Just email us at Karthik@FinCrafters.com