Calculating Point-To-Average Index: Universal Life Insurance Simplified

Indexed Universal Life Insurance (IUL) is a type of permanent life insurance that provides a death benefit and a cash value component. The cash value in an IUL policy can be invested in an equity-indexed account, a fixed-rate account, or a combination of both. The equity-indexed account tracks the performance of a chosen stock market index, such as the S&P 500 or the Nasdaq-100, and earns interest based on its gains. This interest is calculated using various crediting methods, including the point-to-point method, which compares the index's value at two specific time points. To calculate the point-to-average index and determine the interest credited to the policy, the index's value at specific intervals is compared, and the average is calculated. This average is then used to determine the percentage of interest credited to the policy's cash value.

Annual Point-to-Point method

The Annual Point-to-Point method is one of the crediting methods used by insurance companies to calculate gains in indexed universal life policies. This method involves tracking changes in the underlying index from one contract anniversary to another and crediting the return based on that annual change.

Here's how it works:

The Annual Point-to-Point method involves monitoring the performance of a chosen market index over a one-year period. The insurance company will look at the value of the selected index on the day the policy segment begins and compare it to the value of the index one year later. If the value of the index has increased over that one-year period, the cash value of the policy will be credited accordingly, based on the crediting method used. On the other hand, if the value of the index has decreased, the policy will be credited at a guaranteed minimum interest rate, often referred to as the "floor". This floor rate ensures that the policyholder does not lose money, even if the index performs poorly.

The Annual Point-to-Point method is a popular choice for indexed universal life insurance policies, as it allows for potential growth in the cash value while also providing protection against market losses. It is important to note that the crediting methods used can vary among insurance companies and policies, so it is essential to carefully review the details of any indexed universal life insurance policy before purchasing it.

Monthly Sum method

The Monthly Sum method is one of the crediting methods used to calculate gains in indexed universal life insurance policies. This method involves taking the percentage increase in the underlying market index each month and summing them up.

Here's a step-by-step breakdown of the Monthly Sum method:

• Each month, the percentage increase (if any) in the underlying market index is calculated.
• These monthly percentage increases are then summed up over the contract year.
• As long as the overall percentages throughout the contract year are positive, interest will be credited to the account.

It's important to note that the change in the value of the index can also be subject to a cap and participation rate. The cap is the maximum rate of interest that will be credited within a given time period, while the participation rate determines how much of the underlying index's increase will be used in computing the return.

The Monthly Sum method is just one of several methods used to calculate gains in indexed universal life insurance policies, including the Daily Average method, the Monthly Point-to-Point method, and the Annual Point-to-Point method. Be sure to carefully review the information provided by your insurance company and consult with your agent to understand the specific method used in your policy.

Monthly Averaging method

The Monthly Averaging method is one of the crediting methods used to calculate gains in indexed universal life insurance policies. This method takes the individual monthly value of the underlying index(es) and totals them. The total is then divided by twelve to determine the monthly average.

• Calculate the twelve monthly percentage changes in the selected stock market index.
• Add the twelve monthly percentage changes together.
• Divide the total by twelve.
• Apply the product's cap rate to the result.

The Monthly Averaging method offers a higher return compared to the Monthly Point-to-Point method. For example, if you had $100,000 under the Monthly Averaging model at the beginning of 2000, you would have roughly $160,000 fourteen years later. In the same time frame, you would only have $154,000 under the Monthly Point-to-Point model.

The Monthly Averaging method is one of several crediting methods used in indexed universal life insurance policies, including the Annual Point-to-Point and Monthly Sum methods. These methods vary among policies and insurers, so it is important to carefully review the information provided and consult with an agent to understand the specific method used.

Daily Average method

The Daily Average method is one of several methods used by insurance companies to calculate gains in indexed universal life policies. This method calculates the average of the index's daily values over a given period, typically a month.

Here's how it works:

• The value of the chosen index (e.g., S&P 500, Dow Jones Industrial Average) is recorded at the beginning of each day during the month.
• The daily values are summed up and then divided by the number of days in the month to determine the average.
• The average is compared to the value of the index at the beginning of the month to determine the percentage of index change.
• This percentage is then used to calculate the interest credited to the policy's cash value.

For example, let's say the chosen index has a value of 1000 at the beginning of the month. Over the next 30 days, the daily values of the index fluctuate, resulting in a sum of 30,500. To find the average, we divide 30,500 by 30, which gives us an average of 1016.67. The percentage change from the beginning of the month is then calculated as follows: ((1016.67 - 1000) / 1000) x 100 = 1.67%. This means that the policy's cash value will be credited with interest based on a 1.67% increase.

It's important to note that insurance companies may use different methods, and it's crucial to carefully review the specifics of your policy and consult with an agent to fully understand how your policy's gains are calculated.

Monthly Point-to-Point method

The Monthly Point-to-Point method is a strategy for crediting interest in Indexed Universal Life (IUL) policies. It is a dynamic way to calculate interest, aligning the growth of the policy with market trends. Here's how it works:

Crediting Strategy

The Monthly Point-to-Point method determines how interest is credited to the policy's cash value. It offers a way to calculate interest that is aligned with market trends, providing a mechanism to potentially enhance the cash value of an IUL policy.

Index Performance-Based

This method relies on the changes in a selected market index. The performance of the chosen market index determines how the policy's cash value is credited. The most common index used in IUL policies is the S&P 500, but other indices may also be used.

Monthly Index Tracking

The Monthly Point-to-Point method involves monitoring the performance of the selected index each month. This involves tracking the index's value at the beginning of the month and comparing it to its value at the end of the month.

Annual Interest Credit

Interest is applied to the IUL policy at the end of each contract year, based on the monthly tracking. This means that the interest for each month is calculated and accumulated over the year, and then applied to the policy on an annual basis.

The Monthly Point-to-Point method is just one of several methods used to calculate interest in IUL policies. Other methods include the Daily Average method, the Annual Point-to-Point method, and the Monthly Sum method. It is important for policyholders to carefully review and understand the specific method used in their policy.

Frequently asked questions