How IUL Crediting Works
An IUL is life insurance first. Understanding the crediting formula and policy charges is essential before evaluating illustrated cash value.
The policy is not the index
The insurer may use the performance of an external index as part of the formula for crediting interest. The policyholder does not own the index or its underlying securities and generally does not receive index dividends through the crediting formula.
Caps, participation rates and spreads
A cap can limit the index gain used for crediting. A participation rate can determine what percentage of a measured gain is used. A spread can reduce the amount used in the calculation. Actual methods vary by carrier, policy and crediting strategy.
The floor does not eliminate policy risk
A zero percent index floor generally means a negative index result does not create a negative index credit for that strategy. Insurance costs, administrative charges, rider charges and other policy expenses can still reduce policy value.
Policy design matters
Premium level, death benefit structure, funding pattern, charges and future policy performance all affect durability. Illustrations contain both guaranteed and nonguaranteed values. A strong review separates those values and tests how the policy may behave under less favorable assumptions.
What to review in an illustration
- Guaranteed values and nonguaranteed assumptions
- Premium amount and intended funding duration
- Death benefit option and insurance charges
- Crediting assumptions and current parameters
- Loan provisions and the effect of distributions
- What could cause the policy to lapse
Frequently asked questions
Is an IUL invested directly in the stock market?
No. Indexed universal life is life insurance. Interest may be credited using a formula tied to an external index, but policy value is not directly invested in that index.
What does a zero percent floor mean?
It generally refers to the index crediting calculation. Policy charges still apply, so a zero index credit does not mean policy value can never decline.
Can caps and participation rates change?
Contract provisions vary. Some crediting parameters can be changed by the insurer subject to contractual guarantees and limits.
Understand the mechanics before the illustration.
Use the IUL Planning Guide to organize your protection goals, funding expectations and questions before comparing policies.
Get the Free GuideEducational information only. Indexed universal life is an insurance product, not a direct investment in a market index. Nonguaranteed values can change. Loans and withdrawals can reduce policy value and death benefit and may create tax consequences if a policy lapses or is surrendered. Review actual carrier materials.