“Risk-free growth” means that the cash value (CV) in an indexed universal life (IUL) insurance policy grows when the stock index goes up, but never goes backward because of negative index performance. In addition, cash-value growth is tax-free. The account balance in an IUL policy can be allocated to one or several market indices (as well as to a minimum guaranteed rate, which is usually low, e.g., 3%). The funds are not invested directly in the market — rather, an allocated portion of the policy account balance is pegged to an index. If the index goes up over a certain time period (usually 1-2 years), the policy account balance is credited with a corresponding percentage. The crediting rate is usually “capped” at some maximum percentage, or by a so-called “participation rate”, or a combination of both. For example, if a crediting rate is capped at 9%, then the crediting rate is the same as the growth rate of the index up to 9%, but never exceeding the cap of 9%. An uncapped “participation rate” of 80% means the account is credited at a rate of 80% of the index growth rate, regardless how much the index increased during the time period. Sometimes, the participation rate is greater than 100% (e.g., 120%), but capped at some maximum (e.g., 10%).

A key factor, however, is that the account crediting rate has a “floor”, usually a 0% floor, so that the crediting rate is never negative.

Does that mean the account value never loses value, no matter what? No, not exactly. Because the policy has recurring costs, principally the “cost of insurance”, but also administrative fees, which are withdrawn annually from the account balance, it is possible that an account balance can decrease during a “zero” year. Nevertheless, a well-designed policy will be robust enough to withstand even several negative years in a row. A poorly-designed policy, however, will not withstand “zero” years, which is why it is so important to work with a competent, honest advisor.

A zero-percent floor in negative years and good growth during positive market years provide secure, essentially risk-free, long-term growth of the policy account balance, which can be used for lifetime income, living benefits and/or a death benefit for beneficiaries.