Index crediting method

Every index account in an indexed universal life (IUL) policy has a crediting method. It fixes which index readings count, how the change is measured and which limits apply. The policyholder allocates the account value across the index accounts and the fixed account, and each part is credited by its own method.

The main methods

• Annual point-to-point. Compares the index on the segment start date with its value twelve months later, and most IUL policies use it: see annual point-to-point.
• Monthly point-to-point. Caps each monthly gain, counts each monthly loss in full, adds the twelve results and applies the floor to the total: see monthly point-to-point.
• Monthly or daily averaging. Compares the start value with the average of the twelve month-end values, or of every daily close, over the year. Averaging softens a fall late in the year and gives a lower credit in a steadily rising one.
• Multi-index blends. A weighted method combines several indices at weights set at the start of the segment; a rainbow method ranks them at the end and gives the largest weight to the best performer.

Adjustments to the credit

• Participation and cap. The participation rate sets the share of the index change used, and the cap rate limits the result. The rates set for each new segment are sometimes called renewal rates.
• Floor. The minimum credit, 0% in most contracts.
• Spread. Also called an asset fee or margin: a set percentage deducted from the index change before crediting, often on accounts with no cap. With a 2% spread, an 8% index rise credits 6%.
• Multipliers. Where a product offers one, a multiplier applies a contractual uplift to the credit, so a positive segment can credit above the headline cap.
• Bonuses. A premium bonus adds a percentage of premium to the account value; an interest-rate bonus adds a set percentage to the credited rate, often from a stated policy year. Both are product-specific and set out in the contract.

Worked example

Illustrative figures, not a forecast. The index starts the year at 5,000 and ends at 5,550, a rise of 11%. The average of its twelve month-end values is 5,250.

• Annual point-to-point, 9% cap, 100% participation: credit 9%, the cap.
• Monthly averaging, same cap: the average is 5% above the start, so the credit is 5%.
• Uncapped account with a 2% spread: 11% less 2%, a credit of 9%.
• Annual point-to-point with an illustrative 1.2 multiplier on the capped credit: 9% × 1.2 = 10.8%.
• If the index instead ends at 4,750 (−5%), the point-to-point and spread accounts credit 0%, the floor. The averaging account can still credit a little if the index spent most of the year above 5,000.

In an international IUL

International IUL index accounts are usually built on annual point-to-point, with 12-month segments, a cap typically between 9% and 11% and a 0% floor. Multipliers appear only on some products, and some indexed accounts carry an index strategy charge. Premium waiting for a segment, and money in the fixed account, accumulates at interest at the rate the insurer declares.

Common questions

Which IUL crediting method is best?

Each suits a different market path: annual point-to-point follows the year as a whole, monthly methods reward steady rises, and averaging smooths the path. Illustrations on the same basis show the difference for a specific policy.

What is a spread in IUL?

A spread, asset fee or margin is a percentage the insurer deducts from the index change before crediting, often on accounts with a high cap or none. If the index rises by less than the spread, the credit is zero.

What is a premium bonus on an IUL policy?

A premium bonus is an extra amount the insurer adds to the account value, set as a percentage of premium. The contract and illustration set out when it is paid and any conditions.

Go deeper: how IUL works, with the full crediting figures.