Every IUL credits interest using a formula. Understanding three terms will tell you more about a policy than any glossy illustration.
The floor
The floor is the minimum interest credited in a period, often 0%. If the index drops 20%, your credited interest is 0%, not -20%. Keep in mind policy charges are still deducted, so cash value can decline in a zero year.
The cap
The cap is the maximum interest credited in a period. If the cap is 10% and the index rises 18%, you're credited 10%. Caps are set by the insurer and can change, usually within a guaranteed minimum.
The participation rate
The participation rate is the percentage of the index gain used to calculate interest. With a 100% participation rate and a 10% cap, a 7% index gain credits 7%. Some strategies offer higher participation with no cap, or use a spread instead.
What really matters
- The carrier's history of keeping caps stable
- Whether the illustration uses a conservative assumed rate
- What happens in the guaranteed column, not just the illustrated one
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Quick answer
What is a floor in IUL?
The floor is the minimum interest credited to an index account, commonly 0%, so index losses aren't credited as negative interest.