In response to a post over at BiggerPockets that BawldGuy wrote, a reader made some assertions about EIULs. These assertions were very general in nature. BawldGuy asked me to post a response using specifics.
See the full post here. Look for the response from Mathew: http://www.biggerpockets.com/renewsblog/2011/05/10/whats-possible-for-many-in-15-short-years-harnessing-real-synergy/
The main assertion is that by having a floor and a cap, you would get worse returns than if you just had the full returns [up and down] from an index. This is pure hogwash. First some background, so we are all on the same page. Buying a mutual fund that is indexed to a particular group of stocks [S & P 500] is a strategy pushed by some Wall Street companies like Vanguard and most financial planners. When people try to compare the returns in an indexed mutual fund [or ETF] to an EIUL they are making an apples and oranges comparison because the EIUL uses a different strategy. Formally, an EIUL is a fixed rate instrument that offers an interest payment that is tied to an index with a 0% floor and a cap [currently 15% at Minnesota Life] each year. The company is not buying all the stocks in the index like a mutual fund does. It purchases fixed rate securities to cover the overall guarantee on the product [3%] and with the left over, purchases options on the index. That is how they are able to offer an interest rate connected to an index. So it is really two completely different strategies. But we can compare results. Here are the actual numbers for the last 30 years. All numbers are percentages:
Date S & P Index Growth EIUL Credit
12/17/81 — -7.43 — 0
12/16/82 — 9.89 — 9.89
12/15/83 — 19.48 — 15.0
12/20/84 — 2.92 – 2.92
12/19/85 – 26.23 – 15.0
12/18/86 – 17.50 – 15.0
12/17/87 – -1.54 – 0
12/15/88 – 12.88 – 12.88
12/14/89 – 27.95 – 15.0
12/20/90 – -5.93 – 0
12/19/91 – 15.87 – 15.0
12/17/92 – 13.83 – 13.83
12/16/93 – 6.41 – 6.41
12/15/94 – -1.73 – 0
12/14/95 – 35.49 — 15.0
12/19/96 – 20.88 – 15.0
12/18/97 – 28.10 – 15.0
12/17/98 – 23.52 – 15.0
12/16/99 – 20.24 – 15.0
12/14/00 – -5.49 – 0
12/20/01 – -14.99 – 0
12/19/02 – -22.43 – 0
12/18/03 – 23.18 – 15.0
12/16/04 – 10.47 – 10.47
12/15/05 – 5.63 – 5.63
12/14/06 – 12.16 – 12.16
12/20/07 – 2.43 – 2.43
12/18/08 – -39.37 – 0
12/17/09 – 22.81 – 15
12/16/10 – 13.39 – 13.39
Compound Average
Return 7.73% — 8.81%
BawldGuy Here: Sorry for the way the numbers are arranged, but I’m president for life of TechTards Anonymous. 
For the last 30 years the annual interest credited on the EIUL would be 1.08% more than the return on the S & P 500 Index! The reason is pretty simple, negative returns hurt more than positive returns help mathematically. You start off with $100 and you lose 25% the first year. You have $75. You then gain the 25% back and you have your original $100, right? Oh…wrong, you have $93.75. What happened to the other $6.25? That is also why simple averaging is misleading when you are looking at returns.
There is a bigger factor than just the math; Psychology. You see, the industry also tracks how individuals do when they invest in mutual funds. And that is a huge component of the investing picture. When we compare the actual results individuals get to the results from the index we see that the individuals underperform the index from 5-8% [According to the latest Dalbar, Inc. study, for the last 20 years mutual fund investors lagged the actual index by 5.31%. [9.14% to 3.83%].
Typically what happens is when the index has a downdraft investors sell their equity mutual funds in favor of other options. This is the proverbial sell low/buy high strategy that creates poor individual returns. Human psychology being what it is encourages this behavior after negative events. But EIULs don’t go negative, therefore avoiding this classic stimulus-response behavior.
Look at the data again.
For the past 30 years there has been only 8 down years. For the last 20 years there have been 5 down years and one was less than -2%. Those five bad years caused folks to underperform the index so much that their returns are less than half those of the index! That’s some powerful stuff.
Now most folks think they are better investors than they really are. This provides an example of how actual investors behave despite how well they think they invest.
EIULs are superior for most folks because they take out normal human negative stimulus-response mechanisms as well as using a superior strategy. The facts speak for themselves.
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