Many individuals assume that Index Universal Life (IUL) crediting rates (“Indexed Returns”) and the equity returns of the underlying fund (for example, the S&P 500 Index) to which they are linked closely track each other. In fact, Indexed Returns can vary significantly from the returns of the underlying index fund as a result of following IUL product factors:
- Participation rate and
- The fact that Indexed Returns do not include dividends paid on the stocks comprising the underlying index.
How do you understand the combined effect of these various factors? The attached article utilizes models developed by John Hancock and VOYA to evaluate one product’s Indexed Returns in comparison to the equity returns of the S&P 500 Index. For example, based on John Hancock’s Rate Translator and a 0% floor, 11% cap and 100% participation rate:
- The crossover rate is 5.3%. Note: The crossover rate is the rate at which the Indexed Return equals the equity return of the underlying index.
- Going from a 5.3% to a 6% Indexed Return (a .7% increase) however requires a nearly 3% increase in the equity return (5.3% to 8.27%).
- However, moving below the crossover rate, a 5% Indexed Return equates to a much lower 4% equity return.
This simple example emphasizes the importance of understanding these complex factors, leaning toward illustrating on a more conservative illustrative Indexed Return basis and closely monitoring performance over the life of the product.