Floor

The floor separates indexed universal life (IUL) from a direct investment portfolio and from variable universal life. When the index falls over a segment, the loss stays with the market and the segment is credited at the floor, usually 0%. Earlier credits stay locked in, so the next positive year compounds from the same base.

How it works

At the end of each 12-month segment the insurer measures the index change, applies the participation rate and the cap rate, then compares the result with the floor. If the result is below the floor, the floor is credited instead.

• The floor applies to the index credit, segment by segment, and is set in the contract.
• Policy charges come off the account value separately, so the account value can fall in a zero-credit year.
• Loans and withdrawals also reduce the account value, whatever the credit.
• The floor is an obligation of the insurer, backed by its general account.

"You are guaranteed to never lose money from stock market losses in an Indexed Universal Life policy for the rest of your life."

Worked example

Illustrative figures, not a forecast. US$100,000 in an IUL segment with a 9% cap, 100% participation and a 0% floor, set against the same sum held directly in the index.

• Year 1, index −20%: the IUL segment is credited 0% and stays at US$100,000. The direct holding falls to US$80,000.
• Year 2, index +25%: the IUL credit is capped at 9%, taking the segment to US$109,000. The direct holding climbs back to US$100,000.

Both figures are before charges, and the direct holding excludes dividends. After two years the index is back where it started, and the IUL segment is 9% higher because the year 2 credit built on the full US$100,000.

In an international IUL

International IUL contracts typically pair a 0% floor with caps between 9% and 11% a year on 12-month segments. Credits use price return, so the floor and the cap apply to the index's price change. The floor and the death benefit are obligations of the issuing insurer, so its financial strength matters for a contract held for 30 or 40 years, whether the policy is owned by an offshore trust, a company or an individual.

Common questions

Can you lose money in an IUL with a 0% floor?

Not through index falls: a segment that ends lower is credited 0%. The account value can still fall, because cost of insurance and policy charges are deducted every month, and loans or withdrawals reduce it.

Is the floor applied every year or over the life of the policy?

On annual point-to-point accounts the floor applies to each 12-month segment as it matures, and each segment's credit is then locked in. On monthly cap accounts the floor applies once a year, to the total of the twelve monthly results.

What is an interest rate floor in life insurance?

It is the minimum rate the contract sets for the fixed account, the lowest the insurer's declared rate can go. It works alongside the 0% floor on the index accounts.

Go deeper: stock market protected investing and how IUL works.