Written By — David Shafer
The biggest advantage for using EIULs is not necessarily the tax advantages. It is the sequence of return issue that most investments suffer from. This is why I believe that EIULs along with investment real estate is the best combination investment out there.
The sequence of return issue is a matter of extreme variance in the most common investments [mutual funds, ETFs, etc.]. Even though, folks are sold on an investment based on its average annual return, market based investments never act like that. In other words they vary, both positively and negatively, from that average annual return — sometimes dramatically. Remember, negative returns hurt more than positive returns help. If you have a 50% drop, you have to have a 100% gain to get back to where you started. The assumption built into using average annual returns is that you will never actually use the invested capital. But most people plan to convert the capital into income during retirement. And this is where the rub is. Historically, you have a greater than 80% chance of retiring within 5 years [before or after] of a major market downturn. And when this happens you end up using capital that won’t have the opportunity to grow back into that average return your investment vehicle was getting. In other words, YOUR return will be significantly less than the average return of your investment vehicle because of this fact.
If you own investment real estate, then you have cash flow [hopefully] that allows you to avoid using your capital for retirement income until you are ready or the market is good. If you have followed a dividend producing stock strategy, you again have the income without tapping into your capital. However, most people need to or want to tap into some of their capital for retirement income. This is where the EIUL comes in handy. The indexing strategy makes sure your cash value doesn’t go negative in those bad markets. So even if you retire into a bear market you haven’t suffered those dramatic losses, so you are not hurt by using that capital. This can give you time to allow the real estate market to come back before you sell your real estate, or time to allow your other investments to come back in a bull market.
Say you take 5 years of healthy chunks of cash from your EIUL waiting for the market to come back. And when it does you sell and put your capital right back into the EIUL by paying off the loans you took against your policy in those 5 years. Or, you can stop taking your income out of the EIUL for a time period and live on the cash from selling your real estate for a few years. The point being is that you can do what is best to maintain your capital because of the tax-free availability of cash inside your EIUL! And compared to the strategy most people are sold, you might actually have a retirement free of market stress because of it!
BawldGuy Here: Imagine you’ve executed the real estate investment strategies which I now recommend. That is, using currently unneeded cash flows and other available capital to consistently pay down balances of any borrowed money secured by income property. Furthermore, imagine you’ve retired just before a downturn, as David mentions. You’ve free and cleared your income property, so even if its income is negatively affected by a down cycle in the economy, it’s still solid income, a high percentage of which is tax sheltered.
Add the ‘stand-alone basket’ of EIUL tax-free income, and you’ve successfully exploited a pretty tasty combo plate. Food for thought. (Sorry about that one.) 
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