IUL Benefits: Bet on the Don't Pass Line

By Jason Konopik, CFO, AMZ Financial Insurance Services, LLC

Since man started gambling there have been countless strategies taken in an effort to beat the house. Unless you happen to be attending MIT, have nerves of steel and can track the cards at a blackjack table, all of these strategies can be disproved mathematically. In absence of being a super genius, it seems to be common sense that if you play long enough, the house always wins. Since I am not a super genius, I go to the casinos to actually have fun. I tend to gamble with realistic expectations and search for social games where, win or lose, I still have a good time.

One of the games fitting that description is craps. The game of craps is simple. Once the initial roll has been made, a point is set (either 4, 5, 6, 8, 9 or 10). Most folks at the table are typically betting on the point being rolled again before a seven gets rolled. If the same number is rolled again before a seven comes up they win—if not, they lose. That is considered a pass bet. It always seems that there is at least one pessimist at the table betting on "don't pass," or that a seven will be rolled before the point. So when that player wins, the rest of the table loses. Typically, these gamblers are despised because if they are winning, the rest of the table is not.

But what if the game of craps was different? What if you felt good and didn't lose your bet regardless of whether a seven was rolled or not? Well, indexed products fit that bill. Indexed product owners cheer for the point to be rolled—for the index to increase—so they can get the positive interest credited to their products. But, they also don't mind if the shooter craps out.

Well, my friends, that is very timely because the economy is crapping out right now. In fact the S&P 500 is currently down around 9 percent year-to-date. And accordingly, almost all 401(k) portfolios, mutual funds, variable products and stock portfolios are hurting. In an index product, the seven roll doesn't lead to a loss for the table; in fact, the table ties when a seven is rolled. There are no losses if the index decreases, because all gains in prior years have been locked-in—meaning, they can't be taken away due to a negative market.

One of the best features of an index product is the reset mechanism inherent in its design. This means that at the time of renewal, the index is reset at the lower value and clients get to ride the index back up. So, from day one of the next year, if the index increases clients are participating in those gains. For most equity based investments, if you roll a seven and then roll a point on the next roll you are just back to even. However, index products give you the unique ability to have a win in that scenario.

I have never been one to bet the "don't pass" line in craps, and I never bet against the table. However, the current stock market and economic conditions show the power of indexed products and dramatically validate their existence. I, therefore, welcome this economic turndown with open arms.

There is no such thing as a stable bear market—meaning a market where the index decreases every single year for a sustained period of time. Even if the S&P 500 is identical five years from now to where it is today, it is going to get there by going up and going down along the way. With an index product, you get to lock-in the gains when the index goes up, reset when the index goes down and never lose interest again.

A great example of this is 1971–1976. In that 5-year period of time, the index decreased by 1.5 percent (three wins and two losses). Investing in a traditional equity investment would have lead to a negative annual return—even without any fees. Investing in a typical IUL with a conservative 12 percent cap, would have returned almost 40 percent over that same 5-year period for an annualized return of close to 7 percent (three wins and two ties). There is no question where I'd want my bets placed.

I'm not trying to talk you into betting the "don't pass" line but doesn't it pay to provide insurance to your clients against the potential the economy rolls a seven? After all, isn't that the business we are in?