Since index universal policies do not actually participate in the market, negative market performance does not affect the cash values in the policy.
This means that if and when the stock market has a bad or negative performing year, the account is not credited with any negative growth, which can take away prior year’s earnings.
Index life insurance policies normally contain a minimum interest rate for the index account. This rate is normally zero, but not less than zero.
Resets capture more gains
Another important feature of index life policy’s is the annual reset feature. Annual reset is important because it can enable the policy to experience greater gains especially after a poor year of stock market index performance.
In order to provide flexibility of index life policies with its guarantees, and no possibility of losses due to stock market performance, insurance companies place a limit on the amount of interest credits that can be earned from the marked linked accounts. These limits can be called caps or spreads.
Limiting interest returns on cash value life
Index life policy caps work like this. If the market index that’s linked to your life insurance policy earns 14% and your policy has a 12% cap, the amount of earnings credited to your account is the cap rate of 12%.
Another example is that if the cap rate is 12% and the market index earns 8%, then 8% is the interest that gets credited to your index life account.
What happens during bad market years?
In a negative year where the market index linked to your account loses 15%, then the minimum guaranteed interest rate of zero gets credited to your account. The account made no gains that year but did not lose any value due to the negative performing market index. In this regard zero percent is greater than negative 15%.
Power of Annual Reset
Waiting to break even or start gaining now
At this point annual rest kicks in giving the index life an advantage of not needing to wait until the market recovers before it starts to earn, because the new starting point for growth is the new market low point.
Now while other investments that are in the market need to wait for the market to recover just to get back to even, annual reset feature starts to record it’s market index gains from that previous market bottom.
This is one-way the annual reset used in index life policies can help you capture more growth, allowing more interest credits to accumulate inside your cash value index life insurance account.