The Reason Why Insurance Salesmen Don’t Like S&P 500 Total Returns

January 25, 2016

I have yet to find an insurance person who compares an equity-indexed annuity or insurance policy to the S&P 500 Total Return Index, which includes dividends.

One of the reasons could stem from the fact that the S&P 500 Index Price Return (Ticker: ^GSPC on Yahoo!) is what the insurance company uses when determining the amount to credit the policy each month or year. We won’t get into why insurance companies don’t credit based on total returns.

The other reason I can come up with as to why they don’t is that their products look much better when compared to the price index rather than the total return index.

I came across an article Sunday morning about an Indexed Universal Life (IUL) policy. This particular policy had a floor of 2% and a cap of 11.25%. A 2% floor means that the account value will always get credited at least 2%, no matter how badly the market performs. As you can probably guess, an 11.25% cap means that annual gains are capped at 11.25%, no matter how well the market performs. The index used to judge the amount credited to the account is the S&P 500 price return.

Two things can be seen from the graphic I put together, which looks at 10-year holding periods. The returns you see are average annual rates of return over the 10-year period. The math equation for the 1926 – 1935 time period looks like this (NOTE: the list of numbers you see below are the annual price returns for the S&P expressed as factors):

[(1.0572 x 1.3091 x 1.3788 x 0.8809 x 0.7152 x 0.5293 x 0.8485 x 1.4659 x 0.9406 x 1.4137)1/10 – 1]

A couple of things are made clear by the following graphic I put together:

1. It’s definitely to the insurance company’s advantage to credit based on the price index.

2. It’s also obvious why insurance salespeople like to compare their products to the price index (it makes their products look much better).

Comparing IUL to SP500

One thing that also needs to be pointed out is that although the credits are “after all fees and expenses,” that’s not entirely accurate. A better way to say it would be, “after all fees and expenses on the investment account of the policy.” In other words, when a person sends a check to the insurance company, not all of their money goes to work for them in the investment account.

I hope the last few posts about insurance products has been helpful. I am not an insurance expert (heck, a big bulk of insurance salespeople are only familiar with a few of the products they sell), but I would think long and hard before I used the Bank on Yourself strategy or bought an equity-indexed annuity or indexed-universal life policy.

5 responses to The Reason Why Insurance Salesmen Don’t Like S&P 500 Total Returns

  1. Sally O’Malley January 26, 2016 at 6:40 pm

    Thank you for taking the time to explain all that, Mr. … um, uh, oh. I can’t find your name. Why would you want to be anonymous?

    Anyhow, thank you for taking the time to explain all that, Mr. Whoever-You-Are. I’m pretty simple when it comes to financial matters, so it helps to have people who understand the in’s and out’s of everything spell it all out.

    So, I’m looking at your chart, and I see that if I had been smart (or even alive) between 1935 and 1948, I could have made a killing by getting the total return of the S&P 500 Index, compared to indexed universal life insurance.

    So, help me understand, please, if you and I had been living back then, say, in 1935, what would have been a good index fund to invest in to get the S&P Total Return you seem so proud of?

    Oh, wait! There were NO index funds in 1935! They hadn’t been invented yet! Well, dang. You lose a credibility point. According to the Wall Street Journal, “At the completion of its initial public offering on August 31, 1976, the first index mutual fund was born.”–http://www.wsj.com/articles/SB10001424053111904583204576544681577401622, retrieved 1/26/16. Thank you for that, Johnny Bogle.

    So forget about that. And forget about the fact that when Johnny DID create the first S&P 500 Index Total Return Fund (in 1976) the SALES LOAD was something like 6%. Does your sweet little chart take that into account? Huh? Does it? Didn’t think so.

    Well, dang. You lose ANOTHER credibility point. (You aren’t doing so well, are you, Boy?)

    But you MUST have had SOMETHING in mind, Einstein. Maybe there were folks as smart as you who went out and BOUGHT all the stocks represented in the S&P 500 index, then constantly bought and sold them so as to keep them in balance and in just the right proportion so that they matched the S&P 500. Is that what you meant?

    Let’s see … what would have been the trading costs for an enterprise like that? What? Oh, my sweet Lord? You don’t know? You didn’t even take that into account?

    Oh, Sweet Cheeks, you messed up once again.

    Okay, so lets hop to the other side of the fence. Back in 1935, or 1945, or even in 1955 or 1965, your chart proves beyond a shadow of a doubt that a S&P 500 Index total return fund–which didn’t even exist during that time–was in any case a much better bet than any indexed universal life policy I might have been foolish enough to buy. I mean, your numbers prove it, right?

    So question #3 (and I sure do hope you do better on this one than on the last ones, Mr. Head-Up-His-Chart): What indexed universal life policies were you comparing to … back in 1935, or 1945, or even in 1955 or 1965?

    None? Well, Golly Ned! Say it ain’t so! You mean to tell me that indexed universal life insurance wasn’t even available until 1997?

    Oh, Lordy! You have flunked out. Everything you said is now suspect, because you don’t know have a clue what you’re talking about.

    PEOPLE! PLEASE DON’T WASTE YOUR TIME ON THIS BLOG! I PROMISE YOU THE WRITER IS DUMB AS DIRT!!!

    What a pity, for I never even found out his name.

    • It’s okay, Pamela Yellen. You could have used your real name. Unlike your ridiculous comment moderation system (gotta control the message), I will approve comments that don’t agree with me (or even belittle me like a 12-year old).

      I will respond to the rest of your drivel when I have more time.

      • Sally O’Malley January 26, 2016 at 9:21 pm

        Hi, it’s Sally again. Not “Pamela Yellen.” Me. I’ve been checking my email inbox for a message from you, but there isn’t any. Don’t be shy. Write to me. I’ll write back. Who knows? Maybe we can get something going.

        And it’s not that I disagree with you, in spite of the fact that you got my name wrong. I’m just wondering how you do it. I’ll say it again, more s-l-o-w-l-y this time: How are you able to compare the return of an S&P 500 Index fund that didn’t exist at a particular time with the return of a indexed universal life policy that didn’t exist then either?

        I thought that was a pretty neat trick, so I’m curious how you do it. That’s all.

        Cheers, Sweetie.

        • Very mature, Mr. McIntyre. You Bank on Yourself folks are very professional.

          I’ll make a deal with you. You stop using S&P 500 price returns in all your sales literature and blog posts, and I’ll stop comparing insurance products to the S&P 500 TR index.

          Oh, and for the record, Paul Nick used the S&P 500 price return in his illustration on the video. His example started in 1969, which was six years before the creation of the index fund.

        • Lol, and I thought I was a prick. Sally/Pamella/whomever you are: the analysis is called “back testing” — look it up, educate theyself, and then come back and play with the grown ups.