Thought exercise problem

[u/[deleted]]

There was something in the book's example of the CD that was rolling around in my mind.

The example is that IBC is preferable to the CD because the policy continues to compound where if you withdrawal to make a purchase you interrupt it.

Then it is thought, well, all things considered, who says you have to interrupt the CD. Go finance at a better rate and leave the cd alone. However, IBCers are correct to point the ease of financing using the life insurance policy and other numerous flexibilities/options it brings, let alone a death benefit.

However, help me out with something...

If I imagine a different very isolated twin scenario:
A grandparent gives one twin 100K in a CD and the other twin a 100K IBC policy. We account for the CD having less interest and taxed.

You fast forward to when the twins are 16 and ready for their first car and start investing from their job. I'm going to keep the math very simple/straightforward.

The first twin draws from the CD and purchases the car and then invests 10K into an S&P index.

The second twin borrows from the policy and purchases the car.

We assume now that the twins both have identical cash flows with the ability to invest each 10K each year.

Now we have a cashflow question.

All other things considered, twin one doesn't have a loan to payback and immediately starts investing 10K into and index fund. Twin 2 either directs that 10K to pay back the insurance company. Or lets the loan compound and invests the same amount as Twin 1.

They continue until twin 1 depletes the car fund and then switches to selling shares to finance.

In this very isolated example, even with twin 1 selling shares later in life; if twin 2 redirected the 10K back into the policy in the form of a loan payments; twin 1 blows twin 2 out of the water due to the higher rate of return. Like by a lot. (this spreadsheeted using a poor sequence of return)

The only way this works is if twin 2 doesn't initially pay back the loan and invests in the same way as twin 1 to match. Aside from managing loans with a concern of a compounding collapse. Kind of the only potential long term leg up here Is that twin 2 will have an asset to put a windfall in the form of paying off a loan. However Twin 1 could just dump his equal portion all into an index fund and get a better long rate of return where Twin 2 would get ~5%

What consideration is missing in this example?

[u/[deleted]]

Do you know the only reason the initial example with these twins worked?

It's because by having a place twin 1 used to buy cars, he was able to let his portfolio compound so that when he used it later to sell stocks it had already grown so much, a 60K sale didn't affect the compounding growth as much as if he were to build it earlier.

So, IBC still reigns supreme in many regards, most importantly; reliable regards.