Maximum Crediting Rate
A cap can limit the maximum index credit for a crediting period under the contract's formula.
Direct Answer
How Does Indexed Universal Life Work?
IUL is a type of universal life insurance. Premiums fund the policy, charges are deducted, and remaining values may be allocated to index-linked or fixed-interest accounts.
Index-linked interest is determined by the policy's crediting method and can be limited by caps, participation rates, spreads, floors or other terms. The policy does not directly own the external index.
Key Points
Key Takeaways
- IUL is life insurance, not direct ownership of an index or stocks.
- When a strategy uses a price-return index, index movement does not include reinvested dividends.
- Caps, participation rates and other crediting terms can make policy crediting differ from market performance.
- Policy charges can reduce cash value even with a 0 percent index credit.
- Loans can affect policy performance, death benefit and lapse risk.
- Illustrated values are not guarantees.
Crediting
How Index-Linked Crediting Works
The insurer measures the selected index according to the policy's crediting method. The measured change is then adjusted by the contract's limits and formula. The policy is not directly invested in the index or its underlying stocks, so the policyowner does not directly receive dividends or other investment income from those securities.
Important: Index performance and IUL crediting are not necessarily 1:1. When a strategy references a price-return index, such as the headline S&P 500, the index movement used for the calculation does not include reinvested dividends. The policy then applies its participation rate, cap, spread, floor or other crediting terms before interest is credited under the contract.
Point-to-point S&P 500 example: Assume the S&P 500 price index rises 10% from one policy anniversary to the next. That 10% represents price movement only. It does not include S&P 500 dividends, and the policyowner does not receive those dividends. The policy then applies its crediting formula to that 10% price change. With a 100% participation rate and an 8% cap, the credited rate would be limited to 8% before policy charges. With an 80% participation rate and no cap or spread reducing the result, 80% of the 10% price change would be used, producing an 8% credited rate before policy charges. The participation rate does not add dividends, interest or any other component of market return. It only determines how much of the measured index price change is used in the policy's crediting calculation.
Minimum Crediting Rate
A floor can establish a minimum index crediting rate, but it does not stop policy charges from reducing value.
How Much Index Change Counts
A participation rate determines how much of the measured index change is used before other limits apply.
1Measure the index under the policy's method
2Apply participation, cap, spread or other contract terms
3Credit interest to the designated policy account
4Continue deducting policy charges under the contract
Charges
What Costs Come Out of an IUL Policy?
IUL policies can deduct cost of insurance charges, administrative charges, rider charges, premium loads and other amounts defined by the contract.
Two policies using the same illustrated index rate can perform differently because charges, crediting methods, guarantees, loans and premium patterns differ.
Policy Loans
How Do IUL Policy Loans Affect the Policy?
Policy loan mechanics vary by contract. Loans accrue interest and can reduce available policy values and death benefits.
An overloaned policy can create significant lapse and tax consequences. Do not treat policy loans as guaranteed tax-free retirement income.
Illustrations
How Should an IUL Illustration Be Read?
Separate guaranteed values from non-guaranteed projections and understand the assumptions used to create the illustration.
01
Identify guaranteed values separately from non-guaranteed values.
02
Review the premium schedule used in the illustration.
03
Review loan assumptions and whether illustrated loan leverage is involved.
04
Compare current caps and participation rates with contractual guarantees.
05
Request current in-force illustrations after the policy is issued.
06
Stress-test lower crediting and higher charge assumptions.
Risk
What Can Cause an IUL Policy to Underperform or Lapse?
- Lower-than-illustrated index credits
- Caps or participation rates that change within contract limits
- Higher policy charges within contractual limits
- Premiums paid later or lower than illustrated
- Loans or withdrawals that reduce supporting values
- Long periods of weak crediting combined with ongoing charges
Quote & Apply
Start Your Life Insurance Quote
Use the secure tool below to compare available life insurance options and begin an application.
Simple Process
How to Use the Quote & Apply Tool
Enter the information requested by the tool, choose the available coverage amount and duration you want to compare, then review your options. Keep your inputs consistent when comparing quotes.
1
Compare Quotes
Review available options from participating life insurance carriers based on the information you provide.
2
Apply Online
Complete the application electronically. Many applications can be signed digitally.
3
Complete Underwriting
The carrier reviews your application and determines eligibility, final premium, and whether additional requirements are needed.
Common Questions
Frequently Asked Questions
Is IUL invested in the stock market?
No. The policy is life insurance and generally does not directly invest policy value in the external index used for crediting.
Does a 0 percent floor mean cash value cannot go down?
No. A floor can limit the index crediting rate, but policy charges can still reduce cash value.
Are IUL caps guaranteed?
Current caps and participation rates may be non-guaranteed and can change within contract limits. Review the policy's guaranteed terms.
Are IUL illustrations guarantees?
No. Non-guaranteed illustrated values are projections based on assumptions, not promises.
Can I borrow from an IUL policy?
Many IUL policies allow loans, but loan terms vary and loans can affect cash value, death benefit and lapse risk.
Want Help Reading an IUL Illustration?
Review guarantees, charges, crediting assumptions, loan mechanics and funding before relying on projected policy values.
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Educational Disclaimer
The information on this page is provided for general educational purposes and is not individualized insurance, legal, tax, investment or financial advice. Life insurance products, policy provisions, underwriting requirements, premiums, riders, guarantees and availability vary by insurer, policy, state and individual circumstances.
Any guarantees are subject to the claims-paying ability of the issuing insurance company. Non-guaranteed policy values, credited interest, index-crediting terms and illustrated values may change and should not be treated as guarantees.
