What are Indexed Universal Life Crediting Rates?

Indexed Universal Life Insurance (IUL) crediting rates refer to the amount that is credited to an index segment. The index credit will be calculated, and in turn, added to the policy’s index segment at the end of an index period. (This is oftentimes on the calendar year anniversary of the policy). There are several possible crediting methods that may be used by the insurance company with indexed universal life.

These can include:
Annual Point-to-Point
Monthly Averaging
Annual Point-to-Point with Spread
High Participation
Multi-Index Point-to-Point

With each of these crediting methods, the change in the value of the index – if any – will be subject to a cap rate, an index participation rate, and / or an index floor rate. These rates can vary, based on the particular IUL policy.

Graphic symbolizing IUL insurance crediting rates

IUL Insurance crediting rates

Indexed universal life insurance has the potential to accumulate cash value based on the changes in an underlying market index (or even in more than one index), such as the Dow Jones Industrial Average (DJIA) or the S&P 500.

This can give IUL policies the opportunity for greater cash value accumulation compared to other insurance contracts. Also, the built-in annual “floor” helps to ensure that the cash value will not decrease – even if the underlying index suffers an annual loss.

How Interest is Credited to an IUL Policy

When you initially open your Indexed Universal Life insurance policy, your premium – minus insurance charges and fees – is allocated to the index allocation(s) that you choose. The performance of your index(es) is then tracked to calculate the indexed interest using the crediting method that you have chosen. This credited indexed interest, if there is any during a given period, is then added to your policy’s cash value.

Then, the value at the end of a period will be the new beginning value at the start of the next. Each year’s new start value is known as the annual “reset,” whereby each year’s credited interest is locked in on the index crediting date, and a new starting point is determined.

The interest that is credited to your IUL policy’s cash value cannot be taken away – even if the underlying index(es) perform negatively in the future. Therefore, your cash value in an IUL policy has the benefit of continuing to compound in future years, without having to make up for any prior losses.

There are several different types of interest crediting methods that you may choose from (based on the insurance company and the policy itself). These will typically include:

Monthly Sum
Monthly Average

Many of the insurance companies that offer IUL policies may credit the cash value return by using the point-to-point method. When doing so, the underlying market index at the end of each year will be compared to the value at the beginning of given period. In this case, the value of the underlying index(es) at the beginning of that period is compared to the value at the end. Then, when the underlying index(es) is up, interest will be credited to the policy’s cash value, up to the stated cap rate.

The monthly sum crediting method takes the percentage of the underlying index(es) increase or decrease each month and then sums them up. From one month to another, the index(es) may go up or down. Should the overall percentages in the contract year be positive, the interest will be credited to the cash value.

Using the monthly average crediting method, the value of the index(es) at the end of every month will be averaged. This can be as simple as summing up all of the end-of-the-month values and then dividing the total by twelve.

With any of the IUL crediting methods, if the return ends up in negative territory, your IUL policy will not lose value. Instead, it will typically be credited with a 0% return for that period – which can allow your principal to be protected over time, regardless of what occurs in the market overall.

Is IUL the Right Choice for You?