Minimum interest rate and cumulative guarantee

An indexed universal life (IUL) contract sets lower limits on what the insurer can credit. They work at three levels: each account, each index segment and the policy as a whole. They are contract minimums, the lowest the policy can be credited, not the rates an illustration assumes. Contracts and illustrations often call the fixed account minimum the guaranteed minimum interest rate.

How the minimums work

• Fixed or holding account. The fixed account earns a rate the insurer declares, which cannot fall below the contractual minimum. In the international contracts Capital for Life uses, the minimum ranges from 0% to 3% a year: one contract sets 1%, one sets 3% for the first 20 policy years, and one holding account has a 0% minimum. Declared rates on these contracts have been 4.20% to 4.75% from 2024 to 2026.
• Index segments. Each 12-month segment has a floor, 0% in most contracts, so a segment that ends with the index lower is credited zero.
• Minimum cap. The insurer can lower the cap rate for new segments, down to the minimum in the contract: 3% on two of the contracts Capital for Life uses. A segment keeps the cap set on its start date for its full year.
• Cumulative guarantee. Some contracts add a minimum for the policy as a whole. When the policy ends by full surrender, or on some contracts by death or maturity, the insurer compares the account value with a second figure: premiums, net of charges and withdrawals, grown at a set rate. It uses the higher. In the contracts Capital for Life uses, that rate is 2.50% to 3.15% a year.

The cumulative guarantee is measured after policy charges, and any surrender charge and loan are still deducted on a surrender. Loans and partial withdrawals are worked out from the account value and the net cash surrender value, never from the cumulative guarantee value, so the amount available to borrow or withdraw is the same with or without it.

Worked example

Illustrative figures, not a forecast, based on one insurer's simplified example of a 3.15% cumulative guarantee over three years: US$100,000 of premium after charges, with later charges left out.

• The cumulative guarantee value after three years: US$100,000 grown at 3.15% a year, about US$109,750.
• Credits of 8%, 0% and 5%: the account value grows to about US$113,400, above US$109,750, so the account value is used.
• Credits of 2%, 0% and 1%: the account value grows to about US$103,000, below US$109,750, so the cumulative guarantee value is used instead, on full surrender, death or maturity.
• On a surrender in year 3, any surrender charge and loan come off the figure used.

In an international IUL

Illustrations show a minimum basis, using the contract's minimum crediting rates and maximum charges, alongside the assumed rate. Capital for Life uses Assumed Basis #1, the historical back-tested performance of the index strategy over the last 25 years, and Basis #2, 1% a year lower, as a stress test. The minimum basis marks the outer boundary of the contract, not the expected path. The minimums are obligations of the insurer, so its financial strength matters over a contract held for decades by an offshore trust, a company or an individual.

Common questions

Does IUL have a minimum rate of return?

The contract sets minimum crediting rates rather than a return. Each index segment has a 0% floor, the fixed account has a contractual minimum rate, and some contracts add a cumulative guarantee of 2.50% to 3.15% a year. Charges still come off the account value every month. You are guaranteed to never lose money from stock market losses in an Indexed Universal Life policy for the rest of your life.

Can the insurer change the minimum interest rate?

The minimums are written into the contract, for the life of the policy or for the period it states, such as the first 20 policy years. The insurer can change declared rates, and caps for new segments, within those minimums.

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