Life insurance
Indexed universal life: what the cap and the floor really do
Type five years of index changes, a cap, a participation rate and a floor. The calculator shows what the policy credits against what the index did.
Independent site, not an insurer or a broker, and not a funeral home or a government agency.
Indexed universal life: what the cap and floor do
Example, not your result yet· change a figure to see yours
Credited over the five years
30.9%
| Index over the same years | 41.9% |
| Credited, a year on average | 5.5% |
| Index, a year on average | 7.3% |
Interest credited on the account before charges. The index changes are a path you type, not market data; index dividends are never credited.
Indexed universal life, or IUL, is a universal life policy whose cash account is credited with interest linked to a stock market index, usually through a one-year segment with three settings: a cap, the highest rate credited in a year; a participation rate, the share of the index gain that counts; and a floor, often zero, below which the credit never falls. The index itself is not bought: the account does not receive dividends, and the cost of insurance and policy fees are deducted every month whatever the credit. On a five-year path where the index moves 18%, -12%, 7%, 24%, 3%, a 9% cap, 100% participation and a 0% floor credit 30.9% in total, against 41.9% for the index. The floor removed the loss; the cap removed the best years. Insurers can change caps and participation rates after the sale, within the contract’s minimums. The calculator uses only the path and settings you type: this site publishes no index data and no insurer rates.
Data read and sums checked by Radif Partners · Editorial policy · How the figures are worked out
The same path under three sets of terms
The index path of the calculator, credited with a 9% cap at full participation, the same cap at 60% participation, and a 12% cap at 60% participation, all with a floor of zero. The path is an example to test the terms, not market data.
| Year | Index change | Cap 9%, 100% | Cap 9%, 60% | Cap 12%, 60% |
|---|---|---|---|---|
| Year 1 | 18% | 9.0% | 9.0% | 10.8% |
| Year 2 | -12% | 0.0% | 0.0% | 0.0% |
| Year 3 | 7% | 7.0% | 4.2% | 4.2% |
| Year 4 | 24% | 9.0% | 9.0% | 12.0% |
| Year 5 | 3% | 3.0% | 1.8% | 1.8% |
| Five years | 41.9% | 30.9% | 26.0% | 31.6% |
The floor matters most in a falling year and the cap in a strong one. Over a run of years that includes both, the credit lands well below the index in rising markets and above it in falling ones. An illustration that assumes the same rate every year hides that pattern; the sequence of years is what the terms act on.
What is deducted
Every month the policy deducts the cost of insurance for the amount at risk, a policy fee, and often a charge on premiums and on the account. The cost of insurance rises with age. In the early years, surrender charges reduce what can be taken out. A credit of a few percent can be outweighed by these charges, which is why the policy illustration, which the insurer provides with both guaranteed and non-guaranteed columns, matters more than the crediting terms alone.
Loans and the tax position
IUL is sold for tax-deferred growth and tax-free access through loans. The death benefit is generally free of income tax, and a loan is not income while the policy stays in force. If the policy lapses or is surrendered with a loan outstanding, the loan counts as proceeds and the gain above the premiums paid is taxable, as IRS Publication 525 describes; the cash value page has the calculator. A policy funded too fast becomes a modified endowment contract, with loans taxed as gain first.
Who it suits
A buyer with a lifelong need for cover, income high enough to fund the policy well above its minimum for many years, and the time to read the illustration and the contract. For a family that needs cover while children grow up, the DIME calculator and a term policy usually answer the question at a fraction of the premium.
A last check before signing: ask for the illustration at the guaranteed minimum cap and participation, not only at the current ones, and see whether the policy stays in force to age 100 on those terms with the premium you plan to pay.