Indexed Universal Life (IUL) insurance policies offer flexibility and growth potential by linkage of cash value accumulation to a stock market index but how this policy performs depends on several factors. One such factor is the interest crediting strategy.
Let us discuss more about interest crediting strategies on indexed universal life
Interest crediting in IUL policies
An IUL policy grows cash value by the method of interest crediting. Existing whole life insurance policies have a fixed interest rate whereas an IUL uses a crediting strategy to know about the amount of interest credited to the policy’s cash value. The strategies are namely monthly average, point-to-point, and annual reset methods.
Point-to-point credit strategy
It calculates the change in the value of an index from the start to end of a particular period or a year. This helps catch gains in strong market performance but also losses when the market suffers. This technique is simple, but it may not provide a good response to short-term market fluctuations.
Monthly average credit strategy
This approach calculates the average index value over a month or several months and credits interest based on this average. It smooths out the effects of short-term market volatility, potentially providing more stable returns. However, this method might not capture peak gains as effectively as point-to-point strategies.
Annual reset credit strategy
The annual reset method locks in the index gains annually, meaning that each year’s performance is reset to zero. This strategy provides protection against market downturns by ensuring that gains are preserved and not lost in subsequent years. It offers stability and reduces the risk of losing accumulated gains, though it might have a lower cap on potential returns compared to point-to-point strategies.
Impact on policy performance
The choice of crediting strategy has a significant impact on the cash value of your policy and its overall performance. A point-to-point strategy may give higher returns during poor or down-market conditions but can also lead to lower growth during stagnant periods. Conversely, the monthly average and annual reset strategies offer more stability and protection, which can be advantageous in volatile or declining markets.
Considerations and adjustments
While evaluating an IUL policy, you need to assess your financial goals, risk taking capacity and the outlook of the market.
You can also seek help from an advisor to guide you in a better way and choose the policy that is best suited for you.
Conclusion:
Interest crediting policies play a significant role in the performance of your policy, thus shaping the fate of your policy. Therefore, it is necessary for you to take proper decisions and see that the crediting strategy that you are selecting aligns well with your goals.
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