EIULs work, but only when given enough time

I’ve written here MANY times about EIULs. They are great. Their fundamental concept is that you get to buy European style options on various stock or bond indexes. This means that if the index goes negative, you don’t lose your money. If they go positive, you lock in a gain FOREVER. And your gains can in turn generate more locked in gains in the future.

But EIULs require time to do their magic. I just added a new worksheet to my net worth tracking spreadsheet. I have been plowing money into my EIUL since early 2012. That’s perhaps 2 1/2 years worth. In my main spreadsheet, I have the annualized growth rate of my entire net worth tracked to the month. I wanted the same thing on the accumulation value of my EIUL. So I got to work.

Well guess what? After 2 1/2 years, the annualized rate is currently at -4.15%. That doesn’t sound good, ehh? Well, there are several factors to consider. For starters, this worksheet lists the amount of money sent in to Minnesota Life. That means, by definition, a certain sliver of that money is taken out every month to fund the insurance tied to my EIUL. That’s a loss. Some more gets routed towards profits for the agent and the company. What’s left is sent to my cash value to accumulate and, in turn, generate credits.

I have certainly been racking up credits. I have scanned things back over the past couple years, and with the boom in the market, the caps are getting hit. But it doesn’t mean there has been enough cash value YET to overcome the fixed costs of maintenance as well as cost of insurance.

To double check things, and make sure I still understood what was going on, I dug up the original estimate sent by my agent. I can see where he estimates amount of money put into the plan every year alongside estimate accumulation value. I checked each year, and noticed that sure enough, it actually doesn’t go positive until Year 8.

Year 8? YIkes?!? Is that bad? Well, don’t forget, this is an estimate that predicts by the time I reach retirement and stop putting money in, I will have worked things up to an annualized growth of about 8%. Given that the Dalbar Report shows people doing less than 4% with mutual funds (which may yet require taxation after the fact), that sounds pretty good.

What is important to notice is that my growth rate has been moving slowly towards the positive. This is partly impacted by the fact that I just don’t have a big cash value YET. But as it grows, my ability to lock in bigger and bigger gains, and be immune from market shock will also kick in. For people that want to see big returns in five years or less, EIULs are not for you. But given 20 years+, this should result in a nice, steady, slowly accumulating and slowly beat-the-heck-out-of-mutual-funds results.

Happy investing!

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