Indexed universal life

How crediting actually works

Three contract features do most of the work, and every one of them is set by the insurer, varies between products, and can generally be changed within contractual limits.

• A floor, typically limiting credited interest in a down period rather than producing a market loss
• A cap, limiting how much is credited in a strong period
• A participation rate, crediting a stated share of index movement
• A crediting method and segment period determining how movement is measured

What the floor does and doesn't do

A floor limits index-linked credits in a down period. It does not stop the policy's own deductions — the cost of insurance and expenses continue to come out of the account value regardless.

So a year with no index credit is not a neutral year for the policy. This distinction is often lost in the sales conversation, and it's central to how these policies perform over time.

Interrogate the illustration

Illustrations project decades of compounding from assumptions, and small changes in assumed crediting produce very different outcomes at year thirty. Regulation constrains how these are illustrated precisely because the projections were being used to sell.

Ask for the guaranteed column, not only the illustrated one. Then ask what happens if credited interest is materially lower than illustrated: what premium would be required, and could the policy lapse?

Questions worth asking

• What are the current cap and participation rate, and can the insurer change them?
• What are the guaranteed minimums for each, not the current values?
• What are the total policy charges, and for how many years do surrender charges apply?
• What premium is required to sustain the policy under guaranteed assumptions?
• How do policy loans against cash value affect crediting?

Where it fits, and where it doesn't

Indexed universal life can suit someone with a genuine permanent coverage need who understands the mechanism and intends to fund the policy well. It's a poor fit as a primary retirement vehicle for someone who hasn't used available tax-advantaged retirement accounts first, and a poor fit for anyone whose actual need is a defined period of protection.

If a presentation focuses on projected retirement income and barely mentions the death benefit, treat that as a signal about the sale rather than the product.