Is an IUL Actually Invested in the S&P 500? How Indexed Crediting Really Works

Someone shows you an indexed universal life policy and says:

“Your money is linked to the S&P 500.”

It’s easy to hear that and think:

“Okay, so my money is invested in the S&P 500.”

It isn’t.

That’s one of the most important things to understand before using an IUL as part of a retirement strategy.

An IUL can use an index such as the S&P 500 as part of the formula for determining indexed interest.

But that does not mean your policy cash value is directly invested in the index.

You don’t own shares of the S&P 500 through the indexed account.

You don’t own the 500 companies inside the index through the policy.

And your policy doesn’t simply receive whatever return the S&P 500 produces.

So What Does “Indexed” Actually Mean?

Think of the S&P 500 as a measuring stick.

The policy can look at the movement of that measuring stick over a specified crediting period.

Then it applies the policy’s applicable indexed-crediting rules to determine how much indexed interest, if any, is credited.

Those rules can include:

• A starting index value
• An ending index value
• A specified crediting period
• A cap
• A floor
• A participation rate
• A spread
• Other applicable crediting provisions

That’s very different from buying an S&P 500 index fund.

Here’s the Simplest Way to Think About It

If you buy an S&P 500 index fund, you’re buying an investment designed to provide exposure to the securities represented by that index, subject to the fund’s structure, expenses, and tracking.

If you own an IUL that uses an S&P 500-based indexed-crediting strategy, the index is being used as a reference point in an insurance-contract crediting formula.

Those are two different financial products doing two different jobs.

You Don’t Own the Stocks Inside the IUL

This matters because direct stock ownership comes with characteristics an IUL indexed-crediting strategy does not simply duplicate.

A direct market investment can participate in market gains and losses.

It may also receive the economic benefit of dividends through the investment vehicle.

An IUL indexed-crediting strategy works differently.

Your indexed interest is calculated according to the policy’s crediting provisions.

That means the upside may be limited.

It also means the applicable indexed-crediting floor may prevent negative index performance from creating an indexed-crediting result below that floor.

Let’s Use a Simple 10% Cap and 0% Floor Example

These are the assumptions used in the historical JUMP example we’ve discussed.

Suppose the S&P 500 price change over an applicable annual measurement period is:

+7%.

In a simplified example with a 10% cap and no other limiting crediting provision, that 7% would fall below the 10% cap.

Now suppose the index price change is:

+18%.

With the assumed 10% cap, you would not simply assume an 18% indexed-crediting result.

The applicable cap would limit the simplified calculation to 10%.

Now suppose the index price change is:

-15%.

With the assumed 0% indexed-crediting floor, the applicable indexed-crediting calculation could be floored at 0% rather than -15%, subject to the actual policy terms.

That Sounds Like You’re Getting the Market Without the Losses. You’re Not.

This is where explanations can go off the rails.

You are not receiving the full uncapped upside of direct market ownership while somehow removing all the downside.

The mechanics are different on both sides.

The cap can limit upside.

Dividends are not simply credited as though you directly owned the underlying stocks.

Policy charges still apply.

Cost of insurance still applies.

Policy-loan costs can apply.

And the 0% indexed-crediting floor does not guarantee your total cash value cannot decline.

The Floor Applies to Indexed Crediting, Not Your Entire Policy

This distinction is worth repeating.

If the applicable indexed-crediting result is 0%, you may still have policy charges coming out.

If you have outstanding policy loans, applicable loan charges still exist.

If you’re taking money from the policy, that affects policy values too.

So:

0% indexed crediting does not equal 0% change in total policy value.

Does the IUL Receive S&P 500 Dividends?

Not through the indexed-crediting strategy simply because it references the S&P 500.

This is another major difference between an IUL and directly owning an S&P 500 investment.

The indexed-crediting calculation generally references index price movement rather than giving the policyholder the total return of directly owning the underlying securities with dividends.

That’s why you have to be careful when someone quotes a historical “S&P 500 return” while explaining an IUL.

Price Return and Total Return Are Different

If someone says:

“The S&P 500 averaged X%.”

Ask:

“Does that number include dividends?”

If you’re comparing the number with an IUL indexed-crediting calculation that excludes dividends, you need to know the difference.

This Is Why Our Historical JUMP Example Excludes Dividends

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

Dividends were excluded.

The analysis then applied a:

10% cap and 0% indexed-crediting floor.

Negative annual index price changes were replaced with 0% for purposes of the historical indexed-crediting calculation.

Positive annual price changes above 10% were limited to 10%.

Positive annual changes between 0% and 10% remained within that range for the calculation.

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

That produced approximately:

6.87%.

6.87% Is Not the Historical Return of the S&P 500

This is a critical distinction.

The correct description is:

In the historical period used for this analysis, from 2006 through 2020, applying the strategy’s 10% cap and 0% floor to annual S&P 500 price changes, excluding dividends, produced a 6.87% historical average indexed-crediting result.

That’s what the number represents.

It does not mean:

• The S&P 500 returned 6.87%
• The IUL directly earned the S&P 500 return
• The policy is guaranteed to credit 6.87%
• The policy cash value is guaranteed to grow 6.87% per year

Then Where Is Your Money Actually Held?

Your money is part of an insurance contract.

The policy’s cash value is governed by that contract.

The insurance company is responsible for administering the policy, applying the applicable crediting methodology, assessing policy charges, maintaining the insurance benefits, and fulfilling its contractual obligations.

From the policyholder’s perspective, the important point is simple:

Your indexed account is not a brokerage account holding S&P 500 shares in your name.

Why Does the Insurance Company Use an Index at All?

Because the index provides an external benchmark that can be used in determining indexed interest under the policy’s formula.

If the applicable index performs positively during the crediting period, the policy may receive indexed interest according to the contract’s crediting terms.

If the index result is negative, an applicable floor can limit the indexed-crediting result.

The policy is creating a particular crediting structure.

It isn’t turning life insurance into direct stock ownership.

This Is Why the Word “Linked” Can Be Misleading

“Linked to the S&P 500” can sound like:

“My money moves exactly with the S&P 500.”

That’s not what it means.

A more accurate statement is:

“The policy uses changes in an external index as part of the formula used to determine indexed interest, subject to the policy’s crediting terms.”

That sentence isn’t as exciting.

But now you know what you’re actually buying.

What Happens During a Huge S&P 500 Year?

Suppose the index has a tremendous year.

If your applicable indexed-crediting strategy has a cap, the cap can limit how much of that index increase enters the crediting calculation.

That’s one of the tradeoffs.

A direct equity investor can potentially participate in market gains above an IUL’s applicable cap.

The direct investment may also receive the economic benefit of dividends.

Don’t hide that when comparing the two.

What Happens During a Terrible S&P 500 Year?

Now the tradeoff can move the other way.

If the index has a large negative price change, an applicable 0% indexed-crediting floor can prevent that negative index result from creating a negative indexed-crediting rate below the floor.

A directly invested stock portfolio does not have that same IUL indexed-crediting floor.

But remember, the IUL still has policy charges and other costs.

Neither side should be oversimplified.

That’s Why “Which One Has the Better Return?” Isn’t Enough

The direct investment and the IUL aren’t producing returns through the same mechanism.

If your only objective is maximizing uncapped participation in equity-market growth, you need to recognize what a cap can mean.

If your objective includes retirement-income planning, tax treatment, death benefit, market-loss exposure, and access through policy values, you have a larger equation to evaluate.

Now Let’s Add the IUL JUMP Strategy

The JUMP Strategy does not change the fact that the IUL isn’t directly invested in the S&P 500.

That’s important.

The JUMP Strategy adds a separate funding and policy-loan mechanic through the Matching Indexed Participating Loan.

Under the strategy we’re discussing, the matching amount is created as a policy loan.

It is not free money.

It is not an employer match.

It is not a carrier contribution.

It is not a tax credit.

It’s a policy loan.

What Happens to the Matching Indexed Participating Loan Proceeds?

The proceeds are redeployed into the same policy as additional funding.

Under the example we’re discussing, the client-funded portion and the loan-funded portion can participate in the same applicable indexed-crediting strategy.

That means both can have the same potential:

10% cap and 0% indexed-crediting floor

under the example assumptions.

But the loan-funded portion has an additional cost.

The policy loan.

Think of It as Two Buckets

Bucket 1: client-funded dollars.

Bucket 2: Matching Indexed Participating Loan dollars that have been redeployed into the policy.

Both buckets can participate in the applicable indexed-crediting strategy under the example.

Neither bucket becomes directly invested in the S&P 500.

But Bucket 2 carries the applicable loan cost.

The Current Applicable Loan Rate Is 5%

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.

The current 5% rate should not be confused with a guarantee that the rate stays at 5% forever.

That’s why we also want to understand what happens at the contractual maximum.

Where Does Positive Arbitrage Enter the Picture?

Using the historical indexed-crediting 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.

That’s part of the economic logic behind the Matching Indexed Participating Loan strategy.

But Don’t Confuse Arbitrage With S&P 500 Return

The 1.87% modeled spread does not mean the S&P 500 is paying you an extra 1.87%.

It represents the difference between the historical indexed-crediting result used in the model and the current applicable loan cost used in that example.

Those are very different things.

And Positive Arbitrage Is Not Guaranteed

If the indexed-crediting result is 3% and the applicable loan cost is 5%, the simplified spread is unfavorable by 2 percentage points.

If the indexed-crediting result is 0% and the applicable loan cost is 5%, the simplified spread is unfavorable by 5 percentage points.

The 0% indexed-crediting floor doesn’t eliminate the policy-loan cost.

That’s why the JUMP Strategy needs to be modeled under both favorable and unfavorable conditions.

How Does the JUMP Funding Progression Work?

Let’s use the $10,000 annual client contribution example.

In Years 1 and 2, the client contributes:

$10,000 per year.

At the Year 3 JUMP in the example:

$10,000 client contribution + $10,000 Matching Indexed Participating Loan = $20,000 total annual funding shown.

At the Year 5 JUMP:

$10,000 + $20,000 Matching Indexed Participating Loan = $30,000 total annual funding shown.

At Year 7:

$10,000 + $30,000 = $40,000.

At Year 9:

$10,000 + $40,000 = $50,000.

At Year 11:

$10,000 + $50,000 = $60,000.

That Doesn’t Mean the Client Is Investing $60,000 in the S&P 500

This is exactly why the distinction in this article matters.

In the Year 11 example, the client is still contributing $10,000 out of pocket.

The additional $50,000 is Matching Indexed Participating Loan activity under the strategy.

The proceeds are redeployed into the insurance policy.

They are not being deposited into an S&P 500 brokerage account.

And the $50,000 Is Not Free Money

It’s associated with policy indebtedness.

The applicable loan cost matters.

The outstanding loan balance matters.

Policy charges matter.

Long-term policy performance matters.

That’s why I don’t want someone looking at:

$10,000 client contribution + $50,000 additional funding

and thinking the insurance company simply gave them $50,000.

It didn’t.

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

These need to be separated from S&P 500 performance too.

Under assumptions used in one JUMP analysis, 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 Numbers Are Not S&P 500 Returns

They are not IUL indexed-crediting rates either.

And they are not guaranteed policy returns.

Under the assumptions used in that JUMP model, they represent modeled effective results associated with the combination of the base indexed-crediting assumption and the modeled positive-arbitrage effect attributed to successive Matching Indexed Participating Loans, before accounting for applicable policy charges and other factors.

That’s a very different statement from:

“This IUL earns 17.35% from the S&P 500.”

That is not how I would describe it.

Four Numbers You Should Never Mix Together

When you’re evaluating an IUL, keep these separate:

1. S&P 500 price change
2. S&P 500 total return, including dividends
3. IUL indexed-crediting result
4. Modeled effective JUMP Strategy result

If someone moves casually between those four numbers, ask them to slow down.

They’re measuring different things.

Here’s the Question I Would Ask

“What exactly does this percentage represent?”

Not:

“Is this a good percentage?”

First figure out what the number is.

Then decide whether it matters.

What About the Up-to-300% Retirement-Income Comparison?

This is another place where the difference between market return and retirement income needs to be crystal clear.

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.

That does not mean:

“The IUL earns 300% more than the S&P 500.”

It doesn’t.

The 300% Number Is a Retirement-Income Comparison

It is not a return comparison.

The modeled difference can be affected by:

• Client contributions
• Employer contributions when applicable
• Market-return assumptions
• Taxes
• Investment fees
• Indexed-crediting assumptions
• Policy charges
• Matching Indexed Participating Loan mechanics
• Policy-loan costs
• Future JUMPs
• Distribution timing
• Retirement longevity

That’s a completely different equation from asking which strategy had the highest gross investment return.

Can the S&P 500 Investment Earn More and Still Produce a Different Retirement-Income Result?

Yes, in a modeled comparison that can happen.

Because accumulation return isn’t the only variable that affects spendable retirement income.

Taxes matter.

Distribution mechanics matter.

Timing matters.

Costs matter.

Policy-loan mechanics matter.

The amount of money working inside each strategy matters.

But You Have to Make the Comparison Fair

If the 401(k) has an employer match, include it.

If the underlying investment benefits from dividends, account for them appropriately in the investment-return assumption.

Include investment expenses.

Include IUL policy charges.

Include policy-loan costs.

Include taxes where applicable.

Use clearly stated assumptions.

Then compare projected retirement income.

Don’t Make the IUL Win by Pretending It’s an S&P 500 Investment

And don’t make the S&P 500 win by pretending the IUL works exactly like a stock portfolio.

Neither is accurate.

Let each strategy operate according to its own actual mechanics.

Then run the numbers.

The Up-to-300% Number Should Make You More Skeptical, Not Less

If I show you a modeled result that large, I don’t want your response to be:

“Wow. Sign me up.”

I want your response to be:

“Show me exactly where the difference comes from.”

What indexed-crediting assumption was used?

What market-return assumption was used?

Were dividends accounted for?

What taxes were assumed?

What loan rate was used?

How many future JUMPs were assumed?

What policy charges were included?

What retirement distribution was modeled?

Then change those assumptions.

Try to Break the Comparison

Lower the IUL indexed-crediting assumption.

Use the applicable contractual maximum 6% loan rate instead of the current 5% rate.

Remove future JUMPs.

Extend retirement.

Make sure the 401(k) or IRA gets legitimate investment benefits included in its assumptions.

Then compare again.

If the JUMP Strategy still shows a meaningful projected advantage, now you’ve learned something useful.

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.

That doesn’t mean one policy has access to a better S&P 500.

It means the specific policy structures and strategies being compared can have different funding mechanics, loan mechanics, charges, crediting assumptions, and distribution structures.

Again, the index itself is only one piece of the equation.

Is an IUL Safer Than the S&P 500?

That’s too vague to be useful.

They have different risks.

A directly invested stock portfolio has market risk and can experience substantial losses.

An IUL indexed-crediting strategy can have a floor on the applicable indexed-crediting calculation, but the policy has insurance costs, policy charges, contractual mechanics, loan risk, lapse risk, and insurer-related considerations.

You need to identify which risks you’re trying to manage.

Is an IUL Better Than Investing in the S&P 500?

Again, that’s not the question I would use.

Better for what?

If you’re trying to maximize uncapped participation in equity-market growth, direct investing gives you something an IUL’s capped indexed-crediting strategy does not.

If you’re evaluating a broader retirement-income strategy involving insurance protection, indexed-crediting mechanics, potential policy-loan access, tax treatment, and legacy planning, you’re solving a different problem.

The Product Has to Match the Job

You wouldn’t judge a pickup truck and a sports car solely by which one accelerates faster if your actual job is towing a trailer.

The same logic applies here.

What are you trying to accomplish?

Maximum market participation?

Retirement income?

Legacy?

Tax diversification?

Death-benefit protection?

A combination?

Then evaluate the strategy against that job.

What About Retirement Taxes?

This is another major structural difference.

Traditional 401(k) and Traditional IRA distributions are generally included in taxable income under current federal rules, subject to the taxpayer’s circumstances.

A properly structured and maintained non-MEC life insurance policy operates under a different set of tax rules.

Policy values may potentially be accessed through withdrawals to basis and policy loans without current income taxation under current federal rules, subject to applicable requirements.

But don’t turn that into:

“IUL retirement income is guaranteed tax-free.”

That’s too broad.

Policy Status Still Matters

MEC status matters.

Basis matters.

Policy lapse matters.

Policy surrender matters.

Outstanding indebtedness matters.

If a policy lapses or is surrendered with gain and outstanding indebtedness, taxable income may result.

That’s why policy durability is part of the retirement-income analysis.

What About Future JUMPs?

Future JUMPs are another nonguaranteed part of the strategy.

Each planned JUMP requires approval for the applicable death-benefit increase.

Future underwriting can consider health, income, employment, existing insurance, driving history, occupation, hazardous duties, risky hobbies, and other applicable factors.

Initial policy approval does not guarantee every future JUMP.

If Future JUMPs Stop, Rerun the Math

Under the strategy mechanics we’re discussing, a missed future JUMP can pause progression rather than automatically resetting the strategy.

But if future progression changes, the retirement-income projection needs to change too.

You don’t get to remove a future assumption while keeping the retirement-income number that assumption helped create.

This Is the Part Most People Really Care About

When someone asks:

“Is my IUL actually invested in the S&P 500?”

there’s usually another question underneath it.

“Do I actually understand where my retirement money is going?”

That’s a good question.

Because by the time you’re 55 or 60, you don’t want to discover ten years later that the strategy worked differently than you thought.

You Don’t Want to Feel Like You Got Sold a Story

You want to be able to explain the strategy to your spouse.

In plain English.

Where does our money go?

What determines the indexed interest?

What happens when the market falls?

What happens when the market soars?

What are we paying?

How do the loans work?

What could go wrong?

That’s understanding.

Because the Real Fear Isn’t the S&P 500

It’s this:

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

You worked decades for the money.

You don’t want your retirement to hinge on something you never really understood.

You want to remain independent.

You want to make the decision yourselves.

You don’t want your children cleaning up a financial mistake later.

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

“We should be able to handle this ourselves.”

That is exactly why I don’t want to blur the line between an IUL and a stock-market investment.

Questions to Ask When Someone Says an IUL Is “Linked to the Market”

1. Am I actually invested in the S&P 500?
2. Do I own any of the underlying stocks through the indexed account?
3. Does the indexed-crediting calculation include dividends?
4. What index is being referenced?
5. How is indexed interest calculated?
6. What cap applies?
7. What floor applies?
8. Is there a participation rate or spread?
9. Which crediting terms are guaranteed and which can change?
10. What happens during a negative index period?
11. Can my overall cash value still decline when indexed crediting is 0%?
12. What policy charges apply?
13. How do policy loans affect the strategy?
14. What is the current applicable loan rate?
15. What is the contractual maximum applicable loan rate?
16. What happens if indexed crediting is below the loan cost?
17. How many future JUMPs are assumed?
18. What happens if those JUMPs aren’t approved?
19. What retirement distribution is being modeled?
20. How long is the policy projected to remain durable?

The Bottom Line

No, an IUL is not directly invested in the S&P 500 simply because its indexed-crediting strategy references that index.

The S&P 500 can be used as a measuring tool in determining indexed interest.

The policy’s crediting formula then controls how that index movement translates into an indexed-crediting result.

That formula can include a cap, floor, participation rate, spread, or other provisions.

You don’t directly own the underlying index stocks through the indexed account.

You don’t simply receive the S&P 500’s total return.

And you shouldn’t evaluate the policy as if you do.

How We Explain the Difference at FPP Financial

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

I’m not interested in telling you your IUL is invested in the S&P 500 when it isn’t.

I want you to understand exactly what the index does inside the strategy.

We’ll show the index being referenced.

We’ll show the indexed-crediting assumptions.

We’ll show the cap and floor used in the analysis.

We’ll show you that dividends are excluded from the historical 6.87% indexed-crediting calculation.

We’ll separate indexed crediting from the broader modeled JUMP results.

We’ll show the Matching Indexed Participating Loan mechanics.

We’ll show the current applicable 5% loan rate.

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

We’ll look at policy charges, outstanding indebtedness, future JUMP assumptions, retirement distributions, and longevity.

Then 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 What the S&P 500 Actually Does Inside the JUMP Strategy?

That’s the conversation worth having.

Not:

“The IUL is basically the S&P 500 without losses.”

It isn’t.

Instead, let’s show you exactly how the indexed-crediting calculation works and how that feeds into the larger retirement-income strategy.

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.

That’s not because the IUL earned 300% more from the S&P 500.

It didn’t.

The modeled difference can come from the interaction of funding, Matching Indexed Participating Loan mechanics, indexed crediting, loan costs, policy charges, taxes, distribution structure, future JUMPs, and longevity assumptions.

So don’t just look at the final number.

Ask:

“Show me exactly where the difference comes from.”

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

The number isn’t the reason to buy it. The assumptions behind the number are what you need to understand.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• Does an IUL Get S&P 500 Dividends?
• What Happens to an IUL If the S&P 500 Has a Bad Decade?
• 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.

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 interest is determined according to applicable policy crediting terms, which may include caps, participation rates, spreads, floors, crediting methods, and other provisions.

An indexed-crediting strategy that references the S&P 500 generally does not credit S&P 500 dividends as though the policy directly owned the underlying stocks. Direct investments and investment funds can differ in how dividends, expenses, taxes, and distributions are handled.

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.

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.

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. Policy charges and other expenses must also be considered when evaluating overall policy performance.

The modeled effective JUMP results of approximately 8.74%, 11.61%, 14.48%, and 17.35% are not S&P 500 returns, 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.

Planned death-benefit increases under the JUMP Strategy are intended to create additional policy funding capacity while seeking to maintain the intended non-MEC structure. A death-benefit increase does not by itself guarantee that a policy will avoid Modified Endowment Contract status. MEC testing is affected by actual policy design, premium activity, benefit changes, applicable tax rules, and other factors.

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, or indexed crediting. Results can change materially with contributions, employer contributions, market-return assumptions, dividends, taxes, investment fees, indexed-crediting assumptions, 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. The specific traditional IUL design, loan mechanics, policy charges, funding, crediting assumptions, JUMP progression, and retirement distributions can materially alter the comparison.

Comparisons between an IUL and a 401(k), IRA, brokerage account, index fund, or other retirement strategy should use clearly stated assumptions appropriate to each strategy. Direct investments and retirement accounts can provide different market exposure and may receive the economic benefit of dividends, while an IUL indexed-crediting strategy uses different contractual mechanics. Comparisons should not remove legitimate benefits, risks, or costs from either side solely to create a favorable modeled result.

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.