Index Strategy

An index strategy is the means through which buckets of funds in IUL indirectly reflect the performance of one or more equities markets. Many different kinds of indexes can be used, such as the S&P 500, the Dow Jones Industrial Average, the Nasdaq 100, the Hang Seng, the Euro Stoxx, the Russell 2000, certain bond indexes, and even precious metals.

Buckets created in a given index strategy may involve one index or a combination. Some combination index strategies involve multiple indices that are credited according to how each ends up as compared to the others for the given bucket duration.

All IUL index strategies protect the policy owner for investment loss, having a zero floor. A few even have a floor that would always produce a positive result, such as 1% or 2%. However, the trade-off here is that strategies having positive floors result in more limited upside.

Two distinct classes of IUL index strategies include capped vs. uncapped. Capped strategies usually allow 100% of any index gain to be credited to the policy up to some upper limit, called the cap. Uncapped strategies have no such upper limit, but only credit a certain percentage of the gain. This is called the participation rate. While participation rates on uncapped strategies are usually less than 100%, there are an innovative few that allow 100% participation up to a threshold - say 7% - a spread for which there is no participation, and an uncapped 100% participation above that spread. An example from the real world has a certain carrier offering one-year buckets that are tied to the S&P. The policy gets all performance up to 7% in a given policy year. If the index rises by anything above 7% up through 12%, the policy still receives only 7%. However, any index gains above 12% are 100% credited to the policy. For example, a 35% rise in the S&P that year would net 30% to the policyholder!