Because market linking accounts never have losses, their profits are permanent. When the market goes up, excess interest is credited to the linked account. This excess interest becomes new principal and is thereafter protected and guaranteed by the financial institution that issued the account.The tables compare an investment in the S&P500 to a market linking account with a 12% annual cap. Notice that the market linked account provides more consistent earnings and never has to make up a market loss. The direct stock market investment surged ahead during only one of the periods and suffered a period of severe loss. The total return for the entire period 2006 to 2014 was 65.29% for the S&P and 103.4% for the market liked account. The values for ten years (2005 to 2014) were 70.25% for the stock market and 109.13% for market linking.Note that direct stock market investments have the advantage in straight up markets, but market linking shines during all market downturns and equals direct investment during many smaller market increases. By avoiding all market losses, the market linking approach provides consistent stock market profits without the danger of stock market losses. Over the last fifteen years, market linking tripled the stock market return as measured by the S&P 500. See our studies for details
The graph shows the results of an actual indexed portfolio that we have tracked from Oct 1998 (its inceptions) to date (Aug 2013). We calculated an alternative portfolio of the S&P 500 Stock Index from the same day and assumed both portfolios started with $10,000. All dividends were reinvested in the S&P 500 at year end. No provision was made for either taxes or brokerage commissions. The indexed portfolio accumulated inside an insurance product, so all compounding was tax free.
The year end values are shown in the table to the right, along with a calculation of the compounded interest rate that would produce each account value. Please note that the Indexed account never loses money, whereas the S&P account fluctuates with the market.
This is the longest track record we can find for an indexed universal life account. One would wish a longer time span, but the period includes a number of periods that were not favorable for the indexing approach. However, this track record of actual results provides two critical pieces of information about the viability of indexing.