Glossary: IUL and PPLI terms explained

Equity index

An equity index measures the combined value of a defined basket of shares, such as the 500 companies in the S&P 500. In an IUL, an index account's credit is worked out from the index's price change.

Index crediting method

An index crediting method is the formula an IUL policy uses to turn an index's movement over a segment into the credit added to the account value, with the cap, participation rate and floor applied.

Annual point-to-point is the IUL crediting method that compares an index's value on the day a 12-month segment starts with its value on the day it ends, then applies the participation rate, the cap and the floor.

Monthly point-to-point

Monthly point-to-point is an IUL crediting method that caps each month's index gain, counts each month's loss in full, adds the twelve results at the end of the segment and applies the floor to the total.

Cap rate

The cap rate is the maximum credit an IUL index account can earn in a segment, however much the index rises. On international IUL it is typically between 9% and 11% a year.

Floor

The floor is the minimum credit an IUL index account receives in a segment, whatever the index does. In most contracts it is 0%, so a year in which the index falls is credited at zero.

Participation rate

The participation rate is the share of an index's gain that an IUL index account uses to work out the credit, before the cap applies. At 100% the full gain counts; at 80%, a 10% index rise counts as 8%.

Fixed account

The fixed account is the part of an IUL policy that earns a rate of interest the insurer declares, rather than an index-linked credit. The contract sets a minimum interest rate below which the declared rate cannot fall.

Minimum interest rate and cumulative guarantee

Minimum interest rates are the lower limits an IUL contract sets on crediting: the fixed account minimum, the 0% index floor, the minimum cap and, on some contracts, a cumulative guarantee over the life of the policy.

Par fund (participating fund)

A par fund, or participating fund, is the pool of assets an insurer keeps for its participating policies. Policyholders share in its profits through bonuses or dividends, which are only fixed once declared.

Indexed universal life (IUL)

Indexed universal life (IUL) is permanent life insurance whose cash value earns credits linked to a stock market index, within a cap and a floor, alongside a death benefit for life.

Policy values and charges

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Cash value (account value)

Cash value is the balance inside an IUL policy that holds premiums after charges and earns index credits. Insurers also call it the account value: the policy's own value before any surrender charge or loan.

Cash surrender value

Cash surrender value is what the insurer would pay if an IUL policy were surrendered today: the cash value less any surrender charge, outstanding policy loan and unpaid loan interest.

Surrender charge

A surrender charge is deducted when an IUL policy is surrendered, or money is withdrawn, in its early years. It falls over the surrender charge period and reaches nil at the end of it, typically after 10 to 15 years.

Cost of insurance

Cost of insurance is the monthly charge that pays for the life cover in an IUL policy or a PPLI structure. It is worked out on the net amount at risk, the death benefit less the cash value, at a rate that rises with age.

Policy charges

Policy charges are the deductions an insurer takes to provide the cover and run an IUL policy or PPLI structure: premium charges, policy fees, per-1,000 charges, administration charges and the cost of insurance.

Death benefit

The death benefit is the amount an IUL policy or PPLI structure pays when the life insured dies, less any outstanding policy loan. In an IUL it is set by the face amount and the death benefit option chosen.

Death benefit options (level and increasing)

Death benefit options set how an IUL payout relates to the cash value: level (option 1 or A) pays the face amount, increasing (option 2 or B) pays the face amount plus cash value, and some insurers offer return of premium.

Face amount (sum assured)

The face amount, called the sum assured in UK and international usage, is the amount of life cover an IUL policy is written for. It is the base of the death benefit and the figure several charges are calculated on.

Account value vs cash surrender value

Account value and cash surrender value are the two value lines on an IUL illustration. The account value is what the policy holds; the cash surrender value is what a surrender would pay after the surrender charge and any loan.

Premiums and funding

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Target premium

Target premium is a premium level the insurer sets for an IUL or universal life policy from the cover, age and health of the life insured. Premium charges are often set at one rate up to target and another above it.

Flexible premiums

Flexible premiums let the policyholder of an IUL policy choose how much to pay and when, within limits the contract sets, as long as the cash surrender value covers the monthly charges.

Limited pay (10-pay)

Limited pay is a funding pattern in which an IUL policy's premiums are paid over a set number of years, such as 5 or 10, rather than to a later age. Capital for Life's indicative planned premiums are on a 10-pay basis.

Lapse

A lapse ends an IUL policy when the cash surrender value can no longer cover the monthly charges and the grace period passes without enough premium. The cover and the death benefit end.

No-lapse guarantee

A no-lapse guarantee keeps a universal life policy's death benefit in force even if the cash surrender value falls to zero, as long as the policyholder meets a set premium test on time.

Dollar cost averaging into an IUL

Dollar cost averaging into an IUL places a single premium in the fixed account and moves it into the index in equal monthly transfers, usually over 12 months, so the premium enters on 12 dates instead of one.

Loans and withdrawals

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Policy loan

A policy loan is a loan from the insurer itself to the policyholder, secured against the policy's cash value. It is separate from a Lombard loan, which is a loan from a bank secured against pledged assets.

Fixed loan

A fixed loan is an IUL policy loan in which the loaned amount moves to a loan account credited at a set rate while the insurer charges a higher loan rate. The net cost is the difference between the two.

Participating loan (indexed loan)

A participating loan, also called an indexed loan, is an IUL policy loan in which the loaned amount stays in the index account and keeps earning index credits while the insurer charges loan interest.

Lombard loan

A Lombard loan is a loan from a bank secured against assets the borrower pledges, such as an investment portfolio or a life insurance policy. It is separate from a policy loan, which comes from the insurer.

Partial withdrawal (partial surrender)

A partial withdrawal, or partial surrender, takes cash out of an IUL policy permanently. It reduces the cash value and, on many contracts, the death benefit, and in the surrender charge period it carries a charge.

Policy loan interest rate

The policy loan interest rate is the rate an insurer charges on a loan against an IUL policy. The net cost of the loan is that rate less the rate credited on the policy value that secures it.

Illustrations and risk

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Illustrated rate

The illustrated rate is the annual crediting rate a policy illustration assumes for an IUL index account, applied in every year of the projection. It is an assumption, and real credits vary from year to year.

Policy illustration

A policy illustration is the insurer's year-by-year projection of an IUL policy's premiums, charges, account value, cash surrender value and death benefit, on stated crediting assumptions.

Sequence-of-returns risk

Sequence-of-returns risk is the effect the order of yearly returns has on an account that money is being drawn from. In an IUL the floor removes negative credits, but zero-credit years during income still matter.

General account

The general account is an insurer's main pool of assets, which backs its own obligations to policyholders. In an IUL, the account value, the floor and the index credits are all claims on the insurer's general account.

Financial strength ratings

A financial strength rating is a rating agency's opinion of an insurer's ability to meet its obligations to policyholders. AM Best, S&P, Moody's and Fitch each publish them on their own scale.

Cover and ownership

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Jumbo life insurance

Jumbo life insurance is cover on one life large enough to exceed the automatic limits in the insurer's reinsurance treaties, so reinsurers review it case by case, with full medical and financial underwriting.

Joint life second death

Joint life second death cover insures two lives, usually a married couple, and pays the death benefit when the second of them dies. It is also called second-to-die or survivorship life insurance.

Underwriting (medical and financial)

Underwriting is the insurer's assessment of an applicant before it issues cover. Medical underwriting prices the health risk; financial underwriting confirms the cover is justified by income, net worth and need.

Policyholder

The policyholder is the person or entity that holds a life insurance policy and its rights: to the cash value, loans, changes and naming beneficiaries. In international IUL it is usually an offshore trust or company.

Life insured (life assured)

The life insured, or life assured, is the person whose death triggers payment of the death benefit. Their age, health and lifestyle set the underwriting terms and the cost of insurance.

Beneficiary

A beneficiary is the person, trust or company named to receive the death benefit when the life insured dies.

Insurable interest

Insurable interest is the stake the policyholder must have in the life insured: their own life, a spouse's, or a financial loss the death would cause. Insurers require it before they issue life cover.

Free look (cooling-off) period

The free look period, or cooling-off period, is a set time after a policy is issued in which the policyholder can cancel it and receive a refund under the policy terms.

Maturity date

The maturity date is the date set in a life policy, usually when the life insured reaches a stated age, on which the policy is due to end and pay out under its terms.

Riders

Riders are optional benefits added to a base life policy for an extra charge, such as terminal illness or critical illness cover. The base policy is the core contract: the death benefit and the cash value.

Contingent policyholder

A contingent policyholder is the person named to take over a policy if the policyholder dies before the life insured.

Key person cover

Key person cover, also called key man cover, is life insurance a company takes out on a person whose death would cost the business money. The company pays the premiums and receives the payout.

PPLI structure

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PPLI

Segregated account

A segregated account is a ring-fenced account within an insurer that holds the assets backing a PPLI structure, kept apart from the insurer's general account and protected from its general creditors.

Insurance dedicated fund (IDF)

An insurance dedicated fund (IDF) is an investment fund whose interests are available only to insurers, for the segregated accounts backing their contracts. It gives a PPLI structure a professional manager's strategy in fund form.

Investment manager

The investment manager is the regulated firm, approved by the insurer, that runs the portfolio in a PPLI structure's segregated account, with discretion over the investments under an agreement with the insurer.

Bermuda insurer

A Bermuda insurer is a life insurance company licensed and supervised by the Bermuda Monetary Authority under the Insurance Act 1978. Many international IUL policies and PPLI structures are issued from Bermuda.

Premium in specie

A premium in specie is a premium paid by transferring assets, such as listed shares or fund units, to the insurer instead of cash. The assets are valued on the transfer date and held in the PPLI structure's segregated account.

Custodian

A custodian is the bank or trust company that holds the assets of a PPLI structure in safekeeping, in an account for the insurer's segregated account, and settles trades for the investment manager.

Investor control

Investor control is a US tax doctrine: if the holder of a variable life insurance contract controls the underlying investments, the holder is taxed as if it owned them. It shapes how PPLI structures are run.

Tax, trusts and reporting

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IUL and PPLI

Tax deferral

Tax deferral means tax on investment growth inside a life insurance policy or PPLI structure is postponed until a later event, such as a surrender, instead of being charged as the growth arises each year.

Policy held in trust

A policy held in trust is a life insurance policy, or a PPLI structure, held by trustees as policyholder. When a claim is paid, the insurer pays the trustees, who distribute the money under the trust deed instead of through an estate.

Offshore bond

An offshore bond is a life insurance policy issued by an insurer outside the UK and held mainly as an investment. For UK tax, its gains are taxed as income when a chargeable event happens, not year by year.

Personal portfolio bond (PPB)

A personal portfolio bond (PPB) is a UK tax term for a life policy whose holder can select the assets or index behind its value beyond what the law permits. A UK-resident holder is taxed on a yearly deemed gain.

US situs estate tax

US situs estate tax is the US federal estate tax on US-situs assets, such as US shares and US real estate, owned at death by someone who is neither a US citizen nor domiciled in the US. The top rate is 40%.

US withholding tax

US withholding tax is the 30% US tax deducted at source from US dividends, interest and other FDAP income paid to foreign persons, reduced where the Internal Revenue Code or a tax treaty allows.

CRS and FATCA reporting

CRS and FATCA reporting are the automatic exchange rules that require insurers to report cash value life insurance, including IUL policies and PPLI structures, so the details reach the tax authority where the policyholder lives.

Modified endowment contract (MEC)

A modified endowment contract (MEC) is a life insurance contract that, for US federal income tax, is funded faster than the seven-pay test allows. For US taxpayers, lifetime withdrawals and loans from a MEC are taxed income first.