YI asked:
I was sold a Global Index Universal Life by Western Reserve Life. The index is a mixed bag of SP500, European Index and Hongkong Hengseng. high cap is set at 13.25%, and the bottom is set at 2%. When I ran a simulation for the past 20 or so years, I can expect a compounding annual return of 9% from the product. Comparing with the return of SP500 at the same period, the return is a dismal 6%. Investing in stock does not match the life insurance even I added another 2% of dividend from stock. Overall, in spite of heavy charges and expenses, this UL outperforms the scenario of investing the same amount of money in Roth IRA and a term life. Therefore, I am pretty attracted to it. The only uncertainty is that the insurance company can change the cap at its will, and so I am worrying about the probability that the insurance company will lower its cap. Some of my argument is
1) Can insurance company consistently makes more than those on stock market for a long long time, I mean, my life time? I know the money is not invested in stock, but on fixed-return investment and call options (learned from a website). I heard many times that 90% of mutual funds cannot outperform index fund for a 10 year horizon. and I guess some of the mutual funds use sophisticated strategy, which could include fixed-return investment and options. If these mutual fund cannot outperform index, can insurance company?
2) Of course, insurance company need not to worry about how much return they offer now, because they charge a heavy “per unit charge” (about 25% of target prenium) for the first 8 years (in the product I was sold). That is a reserve they keep for future uncertainties. Anyhow, the Equity-indexed life insurance is only around for 9 years, and the company I was sold may have the product for only several years. By that, I mean the possibility of reducing cap won’t be seen in the near term. But I will be locked in the product for life time (of course, I can surrender and pay tax, or transfer the cash value to another product, which is not a good idea either.)
3) I want to know some history of related products.
a) Whole life is indexed to the rate of saving account. Were there any decrease of returns in history? Are they big?
b) I heard on a website (forgot where it is exactly) that indexed annuities are offered earlier than indexed UL, and some of these annuities got into trouble, and the problem is spilled to EIUL now. Can anybody offer a little more insight on this?
