How Does an IUL Cap Affect Indexed Interest and Your Retirement Income?

You open an IUL illustration and see something like this:

0% floor. 10% cap.

The floor sounds easy enough.

If the applicable index calculation is negative, the indexed-crediting result doesn’t go below the applicable 0% floor.

But what exactly does the 10% cap mean?

Does it mean your policy earns 10%?

Does it mean the S&P 500 can’t earn more than 10%?

Does it mean you get the first 10% of every market gain?

And if the index goes up 20%, where does the other 10% go?

Those are good questions.

Because if you’re considering an indexed universal life policy for retirement, the cap can have a major effect on the indexed interest shown in the policy’s long-term projection.

What Is an IUL Cap?

An IUL cap is a limit used in an applicable indexed-crediting calculation.

In a simplified annual point-to-point example with a 10% cap, an index increase above 10% would not automatically produce indexed interest above 10% for that crediting period.

For example:

• If the applicable index change is 4%, the simplified indexed-crediting result could be 4%.
• If the applicable index change is 8%, the simplified indexed-crediting result could be 8%.
• If the applicable index change is 10%, the simplified indexed-crediting result could be 10%.
• If the applicable index change is 15%, the 10% cap could limit the simplified indexed-crediting result to 10%.
• If the applicable index change is 25%, the 10% cap could still limit the simplified indexed-crediting result to 10%.

Actual indexed-crediting calculations are controlled by the insurance contract and can also involve participation rates, spreads, crediting methods, and other provisions.

But that’s the basic idea of a cap.

It puts a ceiling on the applicable indexed-crediting calculation.

The Cap Does Not Cap the S&P 500

This sounds obvious once you say it out loud, but it’s an important distinction.

If the S&P 500 rises 20%, it still rose 20% according to whatever index measurement you’re referencing.

The IUL cap doesn’t change what happened to the index.

It changes how much of that index movement can enter the applicable policy crediting calculation.

Why?

Because an IUL isn’t directly invested in the S&P 500.

Your indexed account isn’t a brokerage account holding shares of all the companies in the index.

The index is being used as a reference for determining potential indexed interest according to the insurance contract.

That’s why the policy can have a cap in the first place.

Here’s a Simple 10% Cap Example

Imagine the index starts the crediting period at 4,000.

At the end of the applicable period, it is 4,800.

That’s a 20% increase.

If the indexed-crediting strategy we’re illustrating has a 10% cap, you should not assume the policy receives 20% indexed interest.

In the simplified example, the applicable indexed-crediting result would be limited to 10%.

That’s the cap doing its job.

So Did You “Lose” the Other 10%?

I wouldn’t describe it that way.

You never directly owned the S&P 500 through the indexed account.

The policy contract said the indexed-crediting calculation was subject to a cap.

The 20% index increase was simply the input.

The policy’s crediting formula determined the output.

That’s an important mental shift.

S&P 500 Return Is Not IUL Indexed Interest

These are two separate numbers.

If the index increases 20% and your applicable indexed-crediting result is 10%, both numbers can be correct.

The first describes what happened to the index.

The second describes what happened after the applicable policy crediting rules were applied.

Now Add the 0% Floor

This is where people begin to understand the tradeoff.

Suppose our simplified strategy has:

10% cap

and:

0% indexed-crediting floor.

If the index increases 20%, the simplified indexed-crediting result may be capped at 10%.

If the index decreases 20%, the applicable indexed-crediting result may be floored at 0%, subject to the policy’s actual terms.

You’re giving up some potential indexed-crediting upside in strong periods in exchange for a crediting structure that can include downside protection against a negative index result below the applicable floor.

But the 0% Floor Does Not Mean Your Policy Cannot Lose Value

This is where the explanation needs to stay accurate.

The floor applies to the applicable indexed-crediting calculation.

It does not eliminate:

• Cost of insurance
• Administrative charges
• Other policy charges
• Policy-loan costs
• Withdrawals
• The effect of outstanding policy indebtedness

So you could have a 0% indexed-crediting result and still see overall policy values decline.

Why Have a Cap at All?

If you’ve spent your entire investing life thinking about uncapped market growth, a cap can feel strange.

You might think:

“Why would I intentionally limit my upside?”

Because the IUL is not trying to duplicate direct equity ownership.

It’s a life insurance contract with a different risk and crediting structure.

You need to evaluate the cap together with the floor, policy charges, death benefit, policy-loan provisions, tax characteristics, and the role the policy is supposed to play in your retirement plan.

Don’t Evaluate the Cap by Itself

A 10% cap might sound great or terrible without context.

Neither reaction tells you much.

You need to know:

• What index is being referenced?
• What crediting method is being used?
• Is there a participation rate?
• Is there a spread?
• What is the floor?
• Can the cap change?
• What charges apply?
• What assumptions are being used in the illustration?

The cap is one part of the equation.

What Happens If the Cap Changes?

This deserves attention because the cap shown when you purchase a policy should not automatically be assumed to remain unchanged for decades unless the contract specifically guarantees it.

Some indexed-crediting terms can be nonguaranteed and can change within contractual limits.

That means a policy illustrated using one cap may experience a different applicable cap later.

If you’re planning to use the policy for retirement 20 years from now, that’s worth stress-testing.

Suppose the Illustration Uses a 10% Cap

Now imagine the applicable cap later becomes lower.

Strong index periods could produce less indexed interest than the original projection assumed.

One year might not change the entire retirement plan.

But repeated differences over many years can compound.

That can affect:

• Projected cash value
• Policy durability
• Loan economics
• Projected retirement distributions
• Projected net death benefit

This Is Why I Would Never Build a Retirement Plan Around One Cap Number

If someone shows me an illustration based on favorable crediting assumptions and says:

“Look how much retirement income this produces.”

My next question is:

“What happens if the crediting terms aren’t as favorable?”

That’s the version I want to see too.

Now Let’s Look at the Historical 6.87% JUMP Example

One historical analysis used in our JUMP modeling examined annual S&P 500 price changes from 2006 through 2020.

Dividends were excluded.

The analysis applied:

A 10% cap and a 0% indexed-crediting floor.

For purposes of that historical calculation:

• Negative annual index price changes were replaced with 0%.
• Positive annual changes above 10% were limited to 10%.
• Positive annual changes between 0% and 10% remained within that range.

The resulting capped-and-floored annual figures were then averaged.

The result was approximately:

6.87%.

The Cap Is One Reason the Number Isn’t the S&P 500’s Return

That 6.87% number is not the historical total return of the S&P 500.

It’s not even being presented as the uncapped S&P 500 price return.

It is a historical indexed-crediting calculation after the stated 10% cap and 0% floor were applied to annual S&P 500 price changes, excluding dividends, for the period being analyzed.

That’s a completely different number.

What Happens in a Year When the S&P 500 Is Up 25%?

Under the simplified 10% cap assumption used in this example, that large positive index year doesn’t contribute 25% to the historical indexed-crediting calculation.

It contributes no more than the applicable 10% cap under the simplified assumptions.

That’s one reason you can’t take a long-term S&P 500 average and plug it directly into an IUL illustration.

And What Happens in a Negative Year?

Under the simplified 0% floor assumption, a negative annual index price change is replaced with 0% for purposes of the historical indexed-crediting calculation.

So the cap clips the upside used in the calculation.

The floor clips the negative index result used in the calculation.

That’s the basic shape of the indexed-crediting mechanism being modeled.

Could a Lower Cap Change the 6.87% Historical Result?

Yes.

If you reran the same historical index-price sequence with a lower cap, years that exceeded that lower cap would contribute less to the calculation.

That could reduce the historical average indexed-crediting result.

The exact result would need to be calculated using the new cap and the same historical data.

That’s why the cap assumption matters.

And That Leads Directly Into the JUMP Strategy

The IUL JUMP Strategy uses a Matching Indexed Participating Loan.

Under the strategy we’re discussing, the matching amount is created as a policy loan and the proceeds are redeployed into the same policy as additional funding.

The match is not free money.

It is not a carrier contribution.

It is not an employer match.

It’s policy-loan activity.

Think of the JUMP Strategy as Two Buckets

Bucket 1: the client’s own funded dollars.

Bucket 2: the accumulated Matching Indexed Participating Loan dollars redeployed into the policy.

Under the example we’re discussing, both buckets can participate in the same applicable indexed-crediting strategy with the same potential:

10% cap and 0% indexed-crediting floor.

But Bucket 2 carries the applicable policy-loan cost.

Why Does the Cap Matter Even More on the Loan-Funded Portion?

Because now you’re comparing potential indexed crediting with the cost of the policy loan.

With the policy structure we currently use for the IUL JUMP Strategy, the applicable loan rate is currently 5%, with a contractual maximum loan rate of 6% for the applicable loan feature.

If indexed crediting is favorable enough to exceed the applicable loan cost, you can have favorable modeled loan economics for that period.

If indexed crediting is below the loan cost, the economics move the other way.

This Is Where the 1.87% Historical Modeled Spread Comes From

Using the historical example:

6.87% historical average indexed-crediting result

minus:

5.00% current applicable policy-loan rate

equals:

1.87 percentage points of modeled positive spread.

But that calculation relies on the 6.87% historical indexed-crediting result.

And the 6.87% historical result was produced using the assumed 10% cap and 0% floor.

So What Happens If the Cap Is Lower?

This is where the pieces connect.

A lower applicable cap can reduce indexed interest during stronger index periods.

Lower indexed-crediting results can reduce the spread between indexed crediting and the applicable policy-loan cost.

A smaller spread can reduce the modeled economic benefit attributed to the loan-funded portion.

That can affect the broader JUMP retirement-income projection.

That’s why the cap is not a minor footnote.

Let’s Make the Example Simple

Suppose one crediting period produces an index result of 12%.

With a 10% cap, the simplified indexed-crediting result might be limited to 10%.

Against a 5% loan cost, the simplified spread would be:

10% – 5% = 5 percentage points.

Now imagine the applicable cap were 7% instead.

The same 12% index result could be limited to 7% under the simplified assumptions.

Against the same 5% loan cost:

7% – 5% = 2 percentage points.

Same index movement.

Same loan-cost assumption.

Different cap.

Different modeled spread.

Now Look at a 0% Crediting Period

If the applicable indexed-crediting result is 0% while the applicable policy-loan cost is 5%, the simplified spread is:

0% – 5% = an unfavorable 5-percentage-point spread.

So positive arbitrage isn’t guaranteed.

The cap doesn’t guarantee it.

The floor doesn’t guarantee it.

The historical average doesn’t guarantee it.

This Is Why I Don’t Want to Hear “The Loan Rate Is Only 5%” Without the Other Side

Five percent compared with what?

That’s the question.

If the applicable indexed-crediting result is 9%, that’s one economic relationship.

If it is 5%, that’s another.

If it is 2%, that’s another.

If it is 0%, that’s another.

The relationship between indexed crediting and loan cost is what matters for the loan-funded portion.

What About the 8.74%, 11.61%, 14.48%, and 17.35% JUMP Numbers?

Under assumptions used in one JUMP model, the combination of the base indexed-crediting assumption and the modeled positive-arbitrage effect attributed to successive Matching Indexed Participating Loans produced modeled effective results of approximately:

• 8.74% at the Year 3 JUMP
• 11.61% at the Year 5 JUMP
• 14.48% at the Year 7 JUMP
• 17.35% at the Year 9 JUMP

Those figures are not IUL cap rates.

They are not indexed-crediting rates.

They are not S&P 500 returns.

And they are not guaranteed policy returns.

They’re Modeled Effective Results

Under the assumptions used in that JUMP analysis, the combination of the base indexed-crediting assumption and the positive-arbitrage effect attributed to successive Matching Indexed Participating Loans produces modeled effective results that can reach those levels before accounting for applicable policy charges and other factors.

That distinction matters enormously.

A 17.35% Modeled Effective Result Does Not Mean the IUL Has a 17.35% Cap

It also doesn’t mean the policy credited 17.35% from the S&P 500.

The applicable indexed-crediting cap in the historical example is 10%.

The larger modeled effective JUMP result is describing something different.

It’s attempting to measure the broader modeled effect of the strategy’s mechanics.

This Is Exactly Why You Have to Label the Numbers

If someone puts 10%, 6.87%, 5%, 1.87%, and 17.35% on the same page without explaining them, it can sound like a mess.

Here’s what they represent in the example:

• 10%: assumed indexed-crediting cap
• 6.87%: historical average indexed-crediting result from the stated 2006-2020 capped-and-floored analysis
• 5%: current applicable policy-loan rate in the policy structure being discussed
• 1.87%: modeled positive spread between the 6.87% historical result and 5% loan cost
• 17.35%: modeled effective result at the Year 9 JUMP under the assumptions used in the referenced model

Five numbers.

Five different meanings.

Now Let’s Talk About Retirement Income

Why should somebody approaching retirement care about a cap?

Because the indexed-crediting assumptions used during accumulation can affect the policy values available to support retirement distributions later.

If the policy receives less indexed interest than projected over many years, the eventual retirement-income projection can change.

That’s especially important when the strategy also has outstanding policy loans.

The Original Illustration Is Not a Promise

Imagine you’re 55.

You see a projection showing a certain amount of retirement income beginning at 65.

That projection uses a set of assumptions.

Ten years later, the actual policy may have experienced different indexed-crediting results, different applicable crediting terms, policy charges, and loan economics.

So at 65, don’t blindly take the retirement distribution shown on the original illustration.

Run the policy again using its actual values.

What Can a Lower Cap Do to Retirement Income?

A lower cap does not automatically destroy an IUL retirement strategy.

But if it reduces indexed interest over time, it can affect:

• Accumulated policy value
• The relationship between indexed crediting and loan cost
• Projected policy indebtedness
• Policy durability
• Projected retirement distributions
• Projected net death benefit

Those effects need to be modeled rather than guessed.

Now Challenge the Up-to-300% Number

In certain modeled comparisons we’ve evaluated, the IUL JUMP Strategy has produced up to approximately 300% more projected retirement income than the 401(k), Traditional IRA, or comparable tax-deferred retirement strategy being evaluated.

If I show you that result, don’t just ask:

“How did you get 300% more?”

Ask:

“What cap assumption helped produce it?”

That’s a much better question.

Then Lower the Cap Assumption

What happens to the historical or modeled indexed-crediting result?

What happens to modeled positive arbitrage?

What happens to policy value?

What happens to projected retirement income?

Does the projected advantage over the 401(k) or IRA remain?

Does it shrink?

By how much?

That’s the math I want to see.

The 300% Is Not a Return Claim

This cannot be repeated enough.

The up-to-approximately-300% figure refers to projected retirement income in certain modeled comparisons.

It does not mean:

• The IUL earns 300% more interest
• The IUL earns 300% more investment return
• The IUL receives 300% more S&P 500 growth
• The JUMP Strategy guarantees 300% more income

The modeled retirement-income difference can come from the interaction of funding, policy-loan mechanics, taxes, indexed crediting, policy charges, distribution structure, future JUMPs, and longevity assumptions.

The Cap Is One of Those Assumptions

Which means you don’t hide it.

You test it.

The 300% isn’t the sales pitch. It’s the question.

What assumptions created the difference?

What happens when those assumptions become less favorable?

What About Approximately 40% More Than a Traditional IUL?

In certain modeled comparisons we’ve evaluated, the JUMP Strategy has produced approximately 40% more projected retirement income than the traditional IUL structure being compared.

If the policies use different indexed-crediting strategies or assumptions, those differences need to be visible.

You can’t simply attribute the entire retirement-income difference to the Matching Indexed Participating Loan mechanics without looking at the rest of the policy design.

Compare the caps.

Compare participation rates where applicable.

Compare spreads where applicable.

Compare policy charges.

Compare loan provisions.

Compare funding.

Then compare projected retirement income.

What Should You Ask About the Cap Before Buying an IUL?

Start with the obvious question:

“What is the current applicable cap?”

Then keep going.

“Is that cap guaranteed?”

“If it isn’t guaranteed, what can change?”

“What does the contract actually say?”

“What cap is being assumed in this illustration?”

“What happens to my retirement projection if the cap is lower?”

Those questions are much more useful than simply choosing the illustration with the highest current cap.

Don’t Buy an IUL Because One Current Cap Looks Great

A retirement strategy can last decades.

You care about how the policy performs across that entire period.

Current crediting terms matter.

Contractual guarantees matter.

Policy charges matter.

Loan provisions matter.

Policy management matters.

One attractive number on the day you buy the policy doesn’t answer all of that.

Stress-Test the Cap

If the illustration uses assumptions consistent with a 10% cap, ask for a more conservative scenario.

Don’t try to predict exactly what future caps will be.

That’s not the point.

The point is to see how sensitive the retirement strategy is to less favorable indexed-crediting economics.

Then Combine a Lower Crediting Scenario With a Higher Loan Cost

This is where the test gets more useful for the JUMP Strategy.

Don’t lower the indexed-crediting assumption while leaving every other assumption favorable.

Test the current applicable 5% loan rate.

Then test the contractual maximum applicable 6% loan rate.

Now you’re putting pressure on both sides of the loan economics.

Then Remove Future JUMPs

Future JUMPs require future underwriting and approval.

They’re not guaranteed at original policy issue.

So run another version where the client reaches a certain JUMP level and doesn’t qualify for any additional JUMPs.

Under the mechanics we’re discussing, prior successful JUMPs don’t automatically disappear simply because a later JUMP isn’t approved.

The progression can pause at the previously achieved matching-loan level.

But the retirement-income projection should be updated.

Now You Have a Real Stress Test

Lower indexed-crediting assumptions.

Less favorable cap economics.

6% loan-rate scenario.

No additional JUMPs.

Longer retirement.

Then ask:

“Can I still live with this outcome?”

That’s much more valuable than staring at the best illustration.

The Psychological Problem With Caps

A cap can bother people for a very human reason.

You don’t want to watch the market have a huge year and feel like everyone else got richer while your policy hit a ceiling.

You start thinking:

“Am I leaving too much money on the table?”

That’s real.

And pretending it isn’t doesn’t help.

But There’s Another Fear Pulling in the Opposite Direction

You also don’t want to reach retirement and watch a large piece of your retirement assets get hit by a major market decline right when you need the money.

So the internal argument becomes:

“How much upside am I willing to give up for a different downside structure?”

That’s a much more honest question.

Especially When You’re 55 or 60

At that point, the decision doesn’t feel theoretical.

You’re getting close enough to retirement to picture the checks stopping.

You know you don’t have 30 years to undo every mistake.

And there’s usually a thought sitting underneath the spreadsheet:

“What if we mess this up and regret it?”

You don’t want your spouse looking at you ten years from now asking why the plan didn’t work.

You don’t want to be forced back into work.

You don’t want your children becoming the backup retirement plan.

“I don’t want to ask my kids for help.”

“We should be able to handle this ourselves.”

That’s why the cap shouldn’t be sold as either a wonderful feature or a terrible limitation.

It should be put into the math.

Questions to Ask About an IUL Cap

1. What is the current cap on the indexed-crediting strategy I’m considering?
2. What does the cap actually apply to?
3. What happens when the index rises above the cap?
4. Is the cap guaranteed for the life of the policy?
5. What contractual limits apply to changes in the cap?
6. What indexed-crediting method is being used?
7. Is there also a participation rate?
8. Is there a spread?
9. What floor applies?
10. Are dividends included in the indexed-crediting calculation?
11. What cap assumption is reflected in the retirement illustration?
12. What happens if future indexed-crediting economics are less favorable?
13. How would lower indexed crediting affect policy-loan economics?
14. What happens if the loan rate reaches its applicable contractual maximum?
15. How would lower indexed crediting affect projected retirement income?
16. How would it affect the projected net death benefit?
17. How would the policy perform if future JUMPs stop?
18. Does the policy remain durable through age 90 or 95 under a weaker scenario?

The Bottom Line

An IUL cap limits the amount of an applicable positive index result that can enter the indexed-crediting calculation under the relevant crediting method.

It does not cap the S&P 500 itself.

It does not mean your policy automatically earns the cap.

It does not mean the cap is necessarily guaranteed to remain unchanged.

And it should never be evaluated without looking at the floor, participation rate or spread where applicable, policy charges, policy loans, and the rest of the insurance contract.

How We Evaluate the Cap at FPP Financial

At FPP Financial, we use our Retirement Math Method™.

I don’t want to tell you:

“This policy has a 10% cap, so it’s great.”

That doesn’t tell you enough.

I want to show you what the cap actually does.

We’ll look at the indexed-crediting assumptions.

We’ll look at the floor.

We’ll look at policy charges.

We’ll look at the Matching Indexed Participating Loan mechanics.

We’ll look at the current applicable 5% loan rate.

We’ll stress-test the applicable contractual maximum 6% loan rate.

We’ll lower the crediting assumptions.

We’ll test fewer future JUMPs.

We’ll look at projected policy indebtedness.

We’ll look at projected retirement income.

And we’ll compare the strategy against the retirement options you’re actually considering.

I don’t try to sell you on the strategy. I make the strategy prove itself with the math.

Want to See How Much the Cap Actually Changes the Retirement Math?

That’s the comparison worth running.

Don’t just show me the 10% cap.

Show me what happens when the index earns more than 10%.

Show me what happens when it earns less.

Show me what happens during 0% crediting periods.

Show me what happens if the long-term indexed-crediting result is lower than expected.

Then show me the retirement income.

In certain modeled comparisons we’ve evaluated, the IUL JUMP Strategy has produced up to approximately 300% more projected retirement income than the 401(k), Traditional IRA, or comparable tax-deferred retirement strategy being evaluated.

But if the cap and indexed-crediting assumptions helped create that projection, they need to be challenged.

Lower them.

Rerun the model.

Then see how much of the projected advantage remains.

Don’t just believe the 300% number. Make the strategy prove where the difference comes from with the math.

The 300% isn’t the sales pitch. It’s the question.

Show me exactly where the difference comes from.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• What Happens If IUL Caps or Participation Rates Go Down?
• Is an IUL Actually Invested in the S&P 500?
• What Is the IUL JUMP Strategy and How Does It Work?

Disclosure

This material is for educational purposes only and is not intended as individualized investment, securities, tax, legal, underwriting, or insurance advice. Indexed universal life insurance is permanent life insurance and is not a qualified retirement plan, IRA, brokerage account, mutual fund, index fund, or direct investment in a market index.

An IUL cap is one component of an applicable indexed-crediting methodology. Actual indexed interest is determined according to the insurance contract and may also be affected by participation rates, spreads, floors, crediting methods, index measurement periods, and other applicable provisions. A cap does not mean the policy will earn that cap in any particular period.

Indexed universal life insurance does not directly invest policy cash value in the S&P 500 or another market index and does not provide the policyholder with ownership of the underlying index securities through the indexed account. Indexed-crediting results should not be confused with market-index returns or direct investment performance.

Caps, participation rates, spreads, bonuses, crediting methods, and other nonguaranteed policy elements may change if permitted under the insurance contract. Current values or terms should not be assumed to remain unchanged for the life of a policy. Policy-specific guarantees and contractual minimums or maximums should be verified using current carrier-approved information and the actual insurance contract.

A 0% indexed-crediting floor applies to the applicable indexed-crediting calculation under the example discussed and does not guarantee that overall policy value cannot decline. Policy charges, cost of insurance, loan costs, withdrawals, and other policy mechanics continue to apply.

The historical 6.87% indexed-crediting example discussed in this article is based on an analysis of annual S&P 500 price changes from 2006 through 2020, excluding dividends, and applying the stated 10% cap and 0% indexed-crediting floor. Historical results do not predict future policy performance and should not be interpreted as a guaranteed future indexed-crediting rate, policy return, or the historical total return of the S&P 500.

Historical results calculated using a different cap, floor, participation rate, spread, crediting methodology, index, or time period could differ materially from the historical example discussed. The 6.87% figure should not be assumed to apply to another policy or crediting strategy.

Life insurance illustrations contain assumptions and may include both guaranteed and nonguaranteed elements. Nonguaranteed values, indexed-crediting assumptions, policy values, death benefits, and retirement-income projections are not promises of future results. Actual policy performance can differ materially from illustrated results.

Matching Indexed Participating Loans are policy loans. They are not free contributions, employer matches, bonuses, tax credits, guaranteed gains, or direct investments in a market index. Under the strategy described here, Matching Indexed Participating Loan proceeds are modeled as being redeployed into the same policy as additional funding. Associated policy indebtedness and applicable loan costs remain part of the policy economics.

Policy loans generally accrue applicable loan charges and can reduce policy values and death benefits and increase lapse risk. Outstanding policy indebtedness generally reduces the net death benefit payable under the insurance contract.

The JUMP Strategy is modeled with applicable loan charges carried forward during the accumulation design rather than requiring the client to pay those charges out of pocket each year. This does not eliminate the economic cost of borrowing, guarantee positive arbitrage, or guarantee that policy values will remain sufficient to support outstanding indebtedness.

With the policy structure discussed in this article, the applicable loan rate is currently 5%, with a contractual maximum loan rate of 6% for the applicable loan feature. The current applicable rate should not be interpreted as a guarantee that the rate will remain at 5%. Current and guaranteed loan provisions should be verified against current approved policy information and the actual insurance contract.

Positive arbitrage is not guaranteed. Periods in which indexed crediting is below the applicable loan cost can produce unfavorable loan economics. Changes in caps or other indexed-crediting terms can affect indexed-crediting results and therefore can affect the modeled relationship between indexed crediting and policy-loan costs.

The modeled effective JUMP results of approximately 8.74%, 11.61%, 14.48%, and 17.35% are not S&P 500 returns, IUL cap rates, indexed-crediting rates, or guaranteed policy returns. They are modeled effective results under the assumptions used in the referenced JUMP analysis, before accounting for applicable policy charges and other factors.

Future JUMPs and associated death-benefit increases are subject to future underwriting and approval. Initial policy approval and prior successful JUMPs do not guarantee future increases. Health, income, employment, existing insurance, driving history, occupation, hazardous job duties, risky hobbies, and other applicable underwriting factors may affect eligibility for additional coverage.

Under the strategy mechanics described, failure to qualify for a future JUMP does not necessarily mean prior successful JUMPs or the previously achieved matching-loan level automatically disappear. Actual policy and carrier rules govern each case, and retirement-income projections should be updated when future JUMP assumptions change.

Policy values from a properly structured and maintained non-MEC life insurance policy may potentially be accessed through withdrawals to basis and policy loans without current income taxation under current federal rules, subject to applicable requirements. Tax treatment can be affected by basis, MEC status, policy lapse, surrender, outstanding indebtedness, and other circumstances. A policy that lapses or is surrendered with gain and outstanding indebtedness may create taxable income.

The up-to-approximately-300% projected retirement-income result cited in this article refers to certain modeled comparisons involving the IUL JUMP Strategy and a 401(k), Traditional IRA, or comparable tax-deferred retirement strategy. It is not a universal result or guarantee and should not be interpreted as 300% more investment return, S&P 500 performance, indexed crediting, or cap-related performance. Results can change materially with contributions, employer contributions, market-return assumptions, dividends, taxes, investment fees, indexed-crediting assumptions, caps, participation rates, spreads, policy charges, loan costs, future JUMPs, distribution timing, and longevity.

The approximately-40% projected retirement-income result refers to certain modeled comparisons involving the JUMP Strategy and the traditional IUL structure being evaluated. It is not a universal result or guarantee. Differences in caps, participation rates, spreads, crediting methods, loan mechanics, policy charges, funding, future JUMPs, and retirement distributions can materially alter the comparison.

Comparisons between an IUL and a 401(k), IRA, brokerage account, index fund, traditional IUL, or other retirement strategy should use clearly stated assumptions appropriate to each strategy. Direct investments and retirement accounts have different market exposure, costs, tax characteristics, and distribution mechanics from life insurance.

Policy-specific guarantees, nonguaranteed elements, underwriting requirements, death-benefit options, MEC limits, loan provisions, loan rates, caps, participation rates, spreads, crediting methods, policy charges, surrender provisions, lapse provisions, and distribution mechanics should be verified against current approved illustrations and the actual insurance contract.

FPP Financial does not provide tax or legal advice. Consult qualified tax, legal, and financial professionals regarding your individual circumstances before purchasing or modifying life insurance or implementing any retirement-income strategy discussed here.