Stock Market Gains Without The Losses
We reveal the asset that lets you profit from market gains while never suffering market losses.
We all knew the market would crash eventually. We just didn’t know that Coronavirus would make it fall so fast.
Back in the day, you could invest your money in high quality bonds, or an FDIC insured CD, and make a reliable 7% to 12% yearly return. Today, you’re lucky if you can get 2% out of either option.
Low yields force investors to gamble their money in the stock market, hoping that stocks will just keep on going up.
And they did, for a while…
DOW Jones Industrial Average: Jan 1, 2016 – Feb 9, 2020
Alas, all bull markets come to an end, and the Coronavirus market crash has been unusually quick and painful, wiping out 4 years of stock market gains:
DOW Jones Industrial Average: Feb 10, 2020 – March 24, 2020
As investors, are we doomed to choosing between either miniscule bond/CD returns or volatile stock market rollercoasters?
Or is there a better way?
As it turns out, there is an asset class that combines some of the best features of bonds/CD’s with participation in stock market rallies.
No investment is perfect, and there are two big catches that you should be aware of:
- While this asset will never decline when the stock market goes down, in exchange for that protection, you’ll only enjoy 90% of the market’s gains when it goes up. For example, if the market goes up 3,000 points in a year, your account will appreciate 300 points less, which gives you a 2,700 point gain.
- This asset does require an investment up front to acquire.
On the other hand, this asset comes with benefits that other investments do not. Here are a few examples:
State guarantees on the principal value of the asset (detalis vary by State)
Built-in tax efficiency
The ability to use leverage to invest in 9% guaranteed return alternative investments at the same time
How It Works
The asset we are discussing is generally misunderstood by Wall Street and the media. It’s called Indexed Universal Life Insurance (IUL).
IUL is a form of life insurance in which your policy contains a capital account called the “Cash Value”. This capital account is owned by you.
Interest accumulates in your capital account every year. The amount of interest you are credited with depends on the performance of the S&P 500 or a basket of stock market indices.
You are guaranteed to never lose money due to stock market performance. You only participate in the gains.
However, you only participate in a percentage of the market’s gains when it goes up. That’s the tradeoff. The percentage you get depends on what the insurance carrier is offering in a given month. As of the time of the writing of this article, the number is 90%, so that is what we’ll go with for right now.
Here are some hypothetical IUL returns for a policy linked to the S&P 500, with 90% participation:
(Note: this is for illustration purposes only and is not intended to predict actual returns.)
In the scenario represented by the table above, the S&P 500 experiences a market crash similar to what we are experiencing right now in 2020. It then enjoys three successive up years. The IUL account never loses value due to stock market downturns. It enjoys 90% of the stock market’s returns. The IUL comes out victorious with a 51.5% gain before fees. The S&P 500 has suffered a loss.
Actual performance varies. Looking back in history, there are periods during which the S&P 500 outperforms IUL, and vice versa.
What’s The Catch?
At the end of the day, IUL is a form of life insurance. That means there are fees to pay for the death benefit that comes with the policy.
One other disadvantage of IUL is that a percentage of your capital account is inaccessible. We aim to provide a minimum of 80% accessibility in your first year. Younger clients can often achieve 90% accessibility. These numbers improve as time goes on.
IUL returns will vary based on stock market performance and your cost of insurance. At Wealth Apex, we structure IUL policies to have the lowest possible fees. We do this by reducing the size of the death benefit to your heirs, which makes the insurance cheaper.
Where People Go Wrong with IUL
IUL is only effective as a high-return alternative to traditional banking when the policy is structured correctly. Unscrupulous insurance agents may try to sell you on policies that involve much higher fees, and significantly less access to your funds.
At Wealth Apex, we minimize your fees and maximize access to your funds as much as possible, even though we in turn receive less compensation. Why do we do it? Because we want to look back with each and every client 5 years down the road and be delighted with the policy’s performance. Some of the highest praise we get is “everything happened exactly the way you said it would.”
Lower fees and maximum liquidity enable our clients to scale up their IUL accounts. For some clients, that can mean placing millions of dollars in the IUL, and then using liquidity to reinvest 80% to 90% of that money twice for greater returns.
Two Returns On One Dollar – Using 9% Guaranteed Return Assets to Complement IUL
A final benefit that is unique to IUL is the ability to leverage approximately 85% of the funds into your capital account to invest in whatever else you please.
For example, let’s say that you want to invest $1,000,000 in an alternative asset that gives you a contractually guaranteed 9% return every year. While most investors are unaware of the existence of such opportunities, they are out there if you know where to look. You’d be surprised by what kind of alternative investments are available with returns guaranteed by an underwriter.
In any event, the traditional way of investing would be to simply invest $1,000,000 straight into the alternative asset.
Instead, you first place $1,000,000 in your IUL. It earns an average 6% annually (that’s a conservative estimate based on past results). Then you borrow 85% of the value of your IUL, or $850,000, at a 3% interest rate. You invest $850,000 in the alternative asset. Meanwhile, your money is still earning an average of 6% annually in the IUL.
Under the traditional strategy, your return is 9% or $90,000 in the first year.
Under the IUL strategy, you have returns of $60,000 from the IUL and $76,500 from the alternative asset. You also have a borrowing cost of $25,500. So your total return is $60,000 + $76,500 – $25,500, or $111,000.
That’s 23% more than you would have earned by investing your money directly in the alternative asset. But that’s just the beginning. The returns from your IUL are 100% tax-free when accessed correctly, which means that more than 50% of your returns are completely tax protected.
Let’s consider the impact of a 23% higher return over time, even before factoring the tax advantages of the IUL:
Remember! The IUL strategy protects a continually growing percentage of your portfolio from taxes, whereas direct investment in an alternative asset typically does not. So the IUL strategy has the potential to yet further outperform the direct investment of your funds.
Another benefit of the IUL is that it works for you year in and year out. Investments in alternative assets often involve years where your money is simply sitting on the side.
Other Benefits Of IUL
Here are some important benefits of IUL:
- The majority of your funds are accessible at any time with no fees, penalties, or taxes when accessed correctly.
- Your funds are protected from creditors, lawsuits, and bankruptcies in most states
- Your policy is completely private and non-reportable
- Your funds can never decrease in value due to market downturns
- The money passes on to your heirs 100% tax-free (unless your estate surpasses exemption).
It’s no surprise that some of our clients consider IUL to be the perfect retirement plan.
If you would like to stop losing money when the market goes down, reach out to us for a free consultation. We’ll discuss your goals and possible means of getting there.