A Fresh Start: How IUL Interest Crediting Really Works

January is a time for clarity, fresh starts, and smarter financial decisions. As many people review their goals for the year ahead, understanding how your life insurance policy can grow and not just protect becomes increasingly important. One of the most powerful features of an Indexed Universal Life (IUL) policy is interest crediting, and knowing how it works can help you make confident, informed decisions in the year ahead.

Let’s break it down.

Step One: Your Premium Starts the Process

Everything begins with your premium. When you pay into your IUL policy, those dollars fund your coverage and are allocated to the interest crediting strategies you choose. These strategies determine how your policy’s cash value has the potential to grow over time.

Unlike traditional investments, IUL policies do not invest directly in the stock market. Instead, they track the performance of a market index such as the S&P 500® to determine how much interest may be credited to your policy.

Step Two: Understanding How Interest Is Calculated Each Year

Each year, your selected index strategies are evaluated based on how the underlying index performed over a defined period, often called an index segment. A common approach is a point to point strategy, which compares the index value at the beginning and end of the segment, typically one year.

If the index increases, your policy may be credited interest.
If the index decreases, your policy is protected from loss due to market decline.

This built in protection, often called a floor, means your cash value will not drop because of negative market performance. Most strategies offer a 0 percent floor, and some even provide a 1 percent floor option.

Step Three: Caps and Participation Rates Explained

Two key factors determine how much interest is credited.

Caps
A cap sets the maximum interest rate your policy can earn for that year.
For example, if the index rises 10 percent but your cap is 6 percent, your policy is credited 6 percent.

Participation Rates
This determines how much of the index’s gain is used.
If the index rises 10 percent and your participation rate is 80 percent, your credited interest would be 8 percent.

Once the index change is calculated, these factors are applied. The result is the interest credited to your policy for that segment year.

Step Four: Locking in Gains and Compounding Growth

One of the most attractive features of indexed interest is that once interest is credited, it is locked in. Future market downturns cannot take it away.

At the end of each policy year, credited interest is added to your accumulated value. Over time, this creates the potential for compound growth, allowing your cash value to build on itself year after year.

It is important to note that monthly policy expenses such as insurance costs and administrative charges are deducted throughout the year before interest is calculated.

Why This Matters Going Into the New Year

As you plan for the year ahead, an IUL policy offers a unique balance.

• Potential to capture market linked gains
• Protection from market losses
• Tax advantaged cash value growth
• Flexibility to adjust strategies over time

January is the perfect time to review how your policy is structured, confirm your allocations align with your goals, and ensure you fully understand how your cash value grows.

A strong financial strategy is not about chasing the market. It is about consistent growth with protection. Indexed Universal Life insurance is designed to do exactly that.

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