I do want to call out this is a VUL, while what you said about IULs are true, this life insurance policy directly buys (and sells, if expenses require it) mutual funds with the cash value. I would agree an 8% illustration is aggressive on an IUL (which is backed largely by corporate bonds), this VUL is allocated 100% to Pru's S&P 500 mutual fund.One problem with your calculations is that stock returns are lumpy. To get to a long-term average of 8%, one has many years with lower or higher returns. I do not know about this particular policy, but most IULs cap the credited rate at some figure that is well below the experience of years with strong stock returns. Thus, one ends up with less money long term from an IUL policy with 8% average stock returns than one would have in a stock account outside of the policy. The caps mean that you give up a large share of positive returns in the good years. That is why one must model a real, or at least realistic, set of annual returns to do a fair comparison. The modeled 8% every year is far from the way stocks behave. Pretending there is no volatility gives a distorted picture of true investment results.
They might refuse to do it, but you could ask the agent to illustrate the performance of the policy using the actual results for the S&P 500 for the last 50 years. For your taxable account simulation, use the annual dividends and capital gains that would have been forced on you. If you think you have all the information, then you can model the insurance policy by applying each year's cap to the S&P500 return. For the insurance company, ask them to guarantee that the caps and expenses will not change for the duration of the policy. If they say they do not do that, then ask them to show you the historical caps applied to IUL policies, year by year, over the time they have been selling them. If they will not do that, then I would stop talking with them.
As you appreciate, at current low dividend rates and low taxes on qualified dividends, there is not that much to be saved by avoiding income taxes on the taxable account. Unlikely to be enough to cover the cost of insurance and other expenses associated with the policy.
And you're a quick thinker! They actually provided that exact ledger going back to 1990. I'll add it to the workbook. Of course, it is still hypothetical given current vs guaranteed expenses.
Statistics: Posted by jhblegend — Mon Aug 05, 2024 2:22 pm — Replies 4 — Views 175