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%.
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.
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.
Other than the Look-Back Bonus. most carriers' Bonus Interest Crediting provisions commence after the tenth policy year.
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.
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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