How Index Crediting Works


Zero– it shows up every day,
usually as the villain, not the hero. But an indexed universal
life insurance policy allows zero to be your hero. First, it provides a death
benefit to your family if you die. It also has a cash value
component that credits interest to the policy based in part
on changes in a major market index, like the S&P 500. Why credit interest based
on a stock market index? Two words– potential
and protection. Indexed universal life
insurance offers protection from index declines with a
feature called the floor. The floor allows
zero to be your hero. So how does it work? Well, let’s keep it simple. You pay a premium to
the insurance company. Your premiums are
put into an account called the basic strategy. A portion of those
premiums are used to cover 12 months
of policy expenses, so they’ll stay in there. Premium dollars paid in excess
of the 12 months of policy expenses go into the
interest crediting strategies of your choice. Insurance companies can have
different types of strategies and can use different indexes,
like the MSCI or S&P 500. We’re going to show you a
point-to-point strategy. The point-to-point strategy
calculates the interest based on a set period of
time, usually 1 or 5 years. The beginning and end of the
time period are the two points. When the change is
positive, your policy is credited interest
after applying any caps and participation rates. Here, the market has a
positive change of 18%. After caps and
participation rates, the policy realizes the
potential of the market index up to the cap of 12%. When the change in your
strategy is negative, it doesn’t impact the
cash value in the policy, because you’re protected
by the 0% floor. The market had a
change of negative 15%. Thanks to the floor,
the strategy bucket gets a 0% interest credit. Remember, though, that
policy expenses will continue to come out of the policy. Indexed universal life insurance
provides a death benefit and offers the potential
for cash value accumulation while never exposing
your premium dollars to the risk of
market downturns, making zero your hero.

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