Bonus Interest Crediting - Indexed Universal Life (IUL)
Bonus Interest Crediting, in the case of Indexed Universal Life Insurance (IUL), is the provision for additional funds being added to the Account Value above any Index Credits for certain policy years. There may be Flat Rate Bonuses, Percentage Multiplier Bonuses, and Look-Back Bonuses. All may be referred to as forms of Accumulation Bonus.
A Flat Rate Bonus pays additional interest at a fixed additional interest rate, currently up to 0.75%. Flat rate bonuses usually commence only after a number of policy years have elapsed - most often after the tenth year.
A Percentage Multiplier Bonus will take whatever Index Credit is paid for the current year and multiply it by one plus the Percentage Multiplier Bonus Rate. One carrier currently pays an additional 15% on top of the rate returned by the Index Strategy in effect that year - a full 1.2% if the index returns 8%, making the total return 9.2% in this instance.
The most aggressive multiplier bonus in the industry currently would allow up to 2.75 times the nominal index return for that year. In the case of an uncapped S&P strategy with a 5% threshold, if the S&P rises 17% in a given year, the nominal index credit would have been 12%. With this kind of multiplier, the actual credit would have been 33%. While in this examples, there would have been extra charges to the policy of 7.5% in order to be eligible for such a bonus, that still leaves a rather impressive net credit of 25.5%. Of course, in those years when the index rises less than 5%, or experiences a loss, the 7.5% results in a loss to the policy's value. Getting the really big gains causes the zero floor to really be a floor of -7.5%. Still, modeling of this strategy over a large number of years seems to justify this practice.
A Look-Back Bonus provides a safety net for some past number of years. For example, one carrier will test actual cumulative index performance over the most recent eight policy years, and if the index returns have averaged less than 3% per year, the policy's Account Value will be adjusted to reflect a minimum of an effective 3% return for all eight years.
From a consumer's standpoint, it is important to know whether or not the Bonus Interest is guaranteed in the contract, or simply an illustrated bonus, contingent upon the company's practice at the time. Also, even if the Bonus Interest Crediting is guaranteed in the policy, does it appear that expense charges inflate during those Bonus years in order to offset the Bonus Interest Credits? The best way to determine if the Bonus Interest is paid for by increased charges is to compare that carrier's charges in the bonus years to other carriers who don't pay a bonus. One carrier that pays a guaranteed bonus of 0.75% after the tenth policy year, clearly charges disproportionate expenses to the policy in relation to typical industry charges for policies without such bonus crediting.
It is critically important to find out if the insurance company has a long track record of treating older policies fairly, with crediting strategies and expense charges that are as favorable as those they quote on new sales presentations. Most - but not all - mutual or mutual holding companies have better histories of fair treatment to policyholders than stock companies (investor-owned). Also, does the carrier provide a pathway for the policy owner to migrate to any newer product that the same company subsequently introduces? A minority of carriers do so, while at the same time waiving surrender charges. Only one company that we know of will also eliminate the need to be insurable if the exchange takes place in the eighth policy year.
Lastly, check and see if the Interest Bonus applies to the full Account Value, or if instead it applies only to the un-borrowed Account Value or Cash Surrender Value.
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