How Would Indexed Universal Life Perform in the Worst, Best,and Most Recent Markets?

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How Would Indexed Universal Life Perform in the Worst, Best,and Most Recent Markets?

The market can be volatile and this volatility can often create uncertainty around “how safe is my money”, regardless of what vehicle your money is in.  In our last piece covering Does Indexed Universal Life Work?, we looked at 3 different markets and how Indexed Universal Life (IUL) would have performed.  IUL performed very well in 2 of those 3 markets.  The purpose of this article is to now look at actual market performance to see how Indexed Universal Life would have performed.¹

A Look at CAP Rates

If you know IULs, then you may also wonder how much volatility can affect the CAP Rates on your IUL product.  As a reminder for those who don’t know what a CAP Rate is; a CAP Rate is the maximum interest that can be credited in a positive year. For example: If the market is up 20% and your CAP Rate is 10% you will receive a 10% interest credit. If the Market is up 8% and your cap 10% you will receive an 8% credit.  You will receive the growth of the market up to your cap rate or the actual performance of the market (not to be less than 0%).

Here are the basics around developing a CAP Rate.  The Insurance Company uses the Yield on their general account to develop a budget for buying options which generate the CAP Rate for a client and also provide the floor of zero.  For example: Let’s say the Insurance Company has a 5% Yield on their General Account Investments.  They may allocate 10% are more of that Yield to buying those options.  If interest rates fall, the Yield goes down which in turn shrinks the options budget.  Likewise if volatility rises, the pricing of the options rise which also shrinks the budget for buying these options.  You can reference the 10yr Treasury Bond Rates and the Volatility Index (VIX) to get an idea about where pricing may be headed.  It’s important to know that this is a guideline not a rule so these are just good indicators to reference.

How Would Indexed Universal Life Perform in the Worst, Best and Most Recent 10yr Period?

Here is how Indexed Universal would have performed in the Worst, Best and Most recent 10yr Market Cycles.  We are showing a 11.5% CAP Rate during these periods.  We are also showing how 75% of that CAP Rate (just less than this actually) would have performed in these same market cycles.

The WORST 10yr Period

1999 – 2008 was the worst 10yr period in history of the market and it produced  a total return of -26%.  We are using this 10yr period to measure how Indexing would have worked during this timeframe compared to the market itself.  When we reference “the market” we are referring to the S&P 500.  A couple items to point out; 1. We decided not to use the first 10yrs of the market due to the newness of the market; 2. We are calculating annual returns in the calendar year, not a specific month or day of the month.

Market Value From 1999 – 2008 Produced a -26% Return

The BEST 10yr Period

2000 – 2009 was the best 10yr period in history of the market and it produced  a total return of 315%.  We are using this 10yr period to measure how Indexing would have worked during this timeframe compared to the market itself.  When we reference “the market” we are referring to the S&P 500.  We are calculating annual returns in the calendar year, not a specific month or day of the month.

Market Value From 1990 – 1999 Produced a 315% Return

The MOST RECENT 10yr Period

2010 – 2019 is the most recent 10yr period in history of the market and it produced  a total return of 189%.  We are using this 10yr period to measure how Indexing would have worked during this timeframe compared to the market itself.  When we reference “the market” we are referring to the S&P 500.  We are calculating annual returns in the calendar year, not a specific month or day of the month.

Market Value From 2010 – 2019 Produced a 189% Return

So what does this information mean to you?  In short, we see that Indexing delivers as promised in these environments by driving significantly value during the worst performing timeframe and lagging returns in the best markets.  The purpose of protecting your money during the down periods is so that you don’t need to rely on the big returns in the up years to drive value to your account.

¹We are not removing expenses for this example, we are looking at the merit of the Indexing Strategy.  You will need to reference an Insurance Company Illustration to see the Expenses, Fees and Cost of Insurance associated with your policy.

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