Indexed Universal Life Insurance: Impact of Cap Rates on Policyholder Value

Indexed Universal Life (IUL) insurance remains a debated product due to its design linking policy performance to market returns while offering downside protection through floors and upside caps. A critical factor in IUL policyholder outcomes is the cap rate set by insurance carriers, which limits the maximum credited interest regardless of market gains. Historical data indicates that reductions in cap rates over time, often managed by carriers, can have a greater impact on policy performance than actual market fluctuations, emphasizing the importance of carriers maintaining stable and fair cap policies for long-term value. Analysis of S&P 500 data from 1950-2024 reveals that IUL policies frequently hit either the floor or cap more than 80% of the time, with over half the years reaching the cap. This insight underscores the cap rate as the pivotal variable in determining credited interest, surpassing the influence of market returns alone. Furthermore, variations in cap rates, such as a reduction from 10% to 8%, can cost policyholders more interest on average than poor market performance. This highlights a key risk factor inherent to IUL products that industry participants must carefully consider. Advisors and agencies are encouraged to prioritize carriers with historically consistent cap rates and a commitment to equitable treatment of policyholders over the policy lifecycle. While market conditions and sequences of returns remain relevant, the stewardship of cap rates plays a more decisive role in delivering sustained value. Such stability is foundational to maintaining the confidence of policyholders and supporting the product's role within comprehensive financial planning strategies. The life insurance industry continues to play a critical role in providing financial protection and wealth transfer solutions, with estimated benefits and claims exceeding $965 billion in 2024. Ensuring IUL products offer transparent and reliable performance through thoughtful management of cap policies aligns with broader industry goals of delivering dependable value to families, businesses, and charitable entities. Ongoing attention to product design, transparency, and policyholder fairness remains essential as the market evolves.