Another ignorant newsletter post “out in the wild” from a web-based CPA newsletter this time;
The American Institute of CPAs
http://www.cpaweb.org/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2012/Wealth/Life_Insurance_2012.jsp
Index Universal Life Insurance
Beware of a possible new scam.
January 19, 2012
by Peter Katt, CFP, LIC
<SNIP>
The problem is that index premiums collected are not being invested in the S&P 500. For example, one company selling a good deal of index universal life has an investment portfolio containing 97 percent fixed income instruments. The sellers of index universal life claim they are able to provide such high potential returns by using various hedging techniques to cover returns that are much larger than what their investment portfolios appear could be produced. Even if companies have actually designed hedging formulas, such exotic strategies are notoriously inaccurate. MF Global being the most recent example of how financial wizards often outsmart themselves. They certainly are an unfair mirage advantage over conventional current assumption universal life policies.
<SNIP>
They ask for a rating between 5 (excellent) to 1 (poor.)
I answered [1], *VERY* poor.
My response to the editors (we’ll see if they publish it):
PeterKatt says; The problem is that index premiums collected are not being invested inthe S&P 500.
He moves on to “example” but never justifies *why* heproposes a non-correlated investment is a “problem.”
For example, one company selling a good deal of index universal lifehas an investment portfolio containing 97 percent fixed income instruments.
*MOST* companies actually have even less…. Most have 93-94% of initial principal invested in high grade bonds and other secure yieldinstruments, generally generating a safe annual yield around 6.3% to 6.5% This yield ensures that each year the resulting mature position is returned to 100% of the original principal invested. *THIS* allows the 6%+yield to subsequently be employed in a more aggressive growth capture strategy.
The sellers of index universal life claim they are able to provide suchhigh potential returns by using various hedging techniques to cover returnsthat are much larger than what their investment portfolios appear could beproduced.
True, and easily proven. A simple Bull Call Debit Spread on the S&P500 (buying the ATM 1 yearCall, and simultaneously selling a 12% Out-Of-The-Money 1 year Call) can be priced by anyone at the CBOE, and costs roughly… wait for it…. 6.3% (Whoa… can you imagine that???) This is a simple and perfectly safe way tocapture the future growth value of the S&P500, in advance, in a manner that cannot decay or be lost.
ANYBODY can do it… even privately in their own account(assuming they can get sufficient yield on the safe bond side.) The downside is that a DIY approach does not get the tax-free policy loan access that funds in an IUL get, at interest rates lower than the IUL yield (even net of total costs, including the death benefit.) Further, a DIY’er won’t get tax deferral on growth. These 3 features(net cost-free liquidity on up to 90% of principal, tax-deferred growth, andtax-free distribution,) can be quantified to be worth much more in savings thanthe internal loads, fees, and costs of insurance… in effect making the death benefit a freebie. No “premium financing” is even required!!!
Even if companies have actually designed hedging formulas, such exoticstrategies are notoriously inaccurate.
This statement, unfortunately, displays a clear ignorance of simple hedging methods. These are not speculations begging for hopeful growth, these are carved in stone once placed.
MF Global being the most recent example of how financial wizards oftenoutsmart themselves.
This is professional “character assassination,” at best. MF Global (along with Madoff) were dishonest thieves with corrupt funds accounting practices… which couldn’t be further from the realities of annually audited statutory reserve insurance companies.
They certainly are an unfair mirage advantage over conventional currentassumption universal life policies.
If we remove the “mirage” reference, this statement gets it right…. The IUL advantages are significant, and quite “unfair” in advantage to the client.
Cheers,
David Donhoff, Advisor
David@LeveragePlanners.com
425-223-4520 Desk
425-652-1001 Cell
206-338-5856 Secure Fax
Leverage Planners
www.LeveragePlanners.com
No Bull Financial, LLC
www.NoBullFinancial.com
413 14th Ave West
Kirkland, WA 98033
