EIUL Basics

I have talked about EIULs before. They are investment grade life insurance contracts that when set up properly, provide a nice place to store your wealth.

EIULs typically invest in some fixed investment vehicles as well as options on indexes. This means they offer the ability to profit from market gains, but avoid market losses. Let’s dig into how these investments can actually help you perform better than index funds.

EIULs typically operate with market caps. For example, they may offer a 0% lower limit and a 15% upper limit on a given market index. If you index goes negative, your money stays put with 0% growth. If it jumps, you receive the upswing, up to the upper limit of 15%.

People have criticized EIULs for causing you to take a hit when the market performs well. After all, if the market grows 26%, it doesn’t seem fair to only let you collect 15%. But this assumes a lot. To really gather the effects, let’s look at some actual market data from 2001 to 2010.

As you can see below, if you had invested $1000 in 2001, your money would have only taken three drops in the market. The other seven years would have had positive growth. But that clearly wouldn’t be enough, because you would still have lost money in the end.

If you instead had invested your money into an EIUL with market caps of 0% and 15%, the following chart paints a different picture.

The left hand column shows the same market gains and losses as before. The middle column shows the growth rate you would have received thanks to your EIUL.

In 2001 and 2002, instead of your money tumbling 33%, it would have stayed put at $1000. This helps you out because in 2003, when the market recovered 26.4%, you would have more money to grow. Even though you are limited to 15% growth in your EIUL, you would have received almost the same amount of growth in actual dollars ($150) as in the first scenario ($180).

By the end of 2010, your money would have almost doubled inside your EIUL, resulting in a 7.2% annualized growth. In the first scenario, you would have actually lost about $50, which is close to 0% growth (and the reason this is known as the Lost Decade).

The next time someone criticizes EIULs as limiting your options, then you should agree. By limiting your losses, you are giving your portfolio an important boost.

2 thoughts on “EIUL Basics”

  1. I’m very interested in the concept but honestly it sounds a bit too good to be true. If investors could protect against loss and maybe be limited to 60% of gains then why isn’t everyone just investing in EUILs? What’s the downside here?

    1. There are a few downsides:
      1. EIUL growth has averaged around 8%, which while better than mutual fund performance, isn’t enough in my opinion to really build retirement wealth.

      2. Why isn’t everyone buying them? Well many DO buy them. Cash value life insurance has been bought up by the rich for decades. At the same time, many of these investment houses that buy life insurance for their top executives keep telling everyone else to Buy Term and Invest The Difference (probably because term insurance is a cash cow).

      3. The third trick to EIULs is finding the right agent. Most agents will attempt to buy the most insurance which kills your ability to build cash value. The right agent will dial down insurance to a minimum and super charge your ability to grow cash value. Takes a lot of research on your end to find such an agent.

Leave a Reply

Your email address will not be published. Required fields are marked *