IUL Policy Offers Index with 200% Par Rate and NO Cap

To learn more about the IUL discussed in this newsletter, click on the following link:


Volatility Control Indexes (VCIs) have been growing in popularity for the last few years as the measuring indexed used in Fixed Indexed Annuities (FIAs).  Why? Because they offer the potential for higher returns than the typical S&P 500 annual point-to-point crediting methods with caps.

If you haven’t downloaded my 11-page VCI white paper where I compare several VCI indexes used in popular FIAs, click on the following link:


200% Participation Rate with NO Cap

Most IUL policies use an annual point-to-point based S&P 500 index (without dividends) with annual caps that range from 10%-14.5%. There are some IUL products that offer a 140% participation rate, but they have even lower caps.

How does this VCI index work to generate returns?

Upside Potential—the index selected used three asset classes to provide the potential for upside growth or protection.

1) The index looks at 10 U.S. equity assets. Each of the 10 equities is represented by exchange-traded funds in different sectors (large cap U.S. materials, energy, financials, technology, etc.).

2) Three fixed income assets—each of the three fixed income assets are represented by exchange-traded funds that track the performance of U.S. treasury bonds with 20+ year maturities, mortgage-backed securities, and high yield U.S. dollar-denominated corporate bonds.

3) Cash—when volatility triggers kick in, money is moved to cash to avoid large drawdowns.

Volatility Managed—the index is monitored on a daily basis, is rebalanced daily if necessary, and will adjust its exposure to the index portfolio if actual volatility is higher or lower than the index’s target volatility.

Dynamic Rebalancing—the index rebalances into a new portfolio only when specific trigger conditions are met, allowing the index to avoid unnecessary adjustments in less volatile markets while adjusting as often as daily when markets are more volatile.

5% target volatility—if you don’t know what target volatility is, I recommend you read my VCI white paper.

All available investment indexes are examined and ones with a target volatility of more than 5% are discarded. Then of the indexes left, the ones with the highest expected return potential are selected (trying to make the “optimal” portfolio). If volatility gets too high, money is moved into the fixed income assets or even into cash.

A 200% participation rate (even with a conservative VCI) can do very well!

Let’s look at the historical returns of this “mechanically managed” (no human decision making) index (which makes back testing as accurate as you can make it). As you can see, the product credits .25% in zero years as well (2015 and 2018).

2009                       5.33%
2010                       14.84%
2011                       20.57%
2012                       18.02%
2013                       12.05%
2014                       28.62%
2015                       0.25%
2016                       14.12%
2017                       24.60%
2018                       0.25%

Average               13.49%

An annual S&P 500 (no dividends) IUL with a 12.5% cap would have generated a return of 9.25% over the same time period as above. Would your client like the 200% participation rate no cap IUL crediting method better than a 12.5% S&P based product? Hmm.  I think you know the answer.

The current illustrated rate of the product is 7.98%.

Also, this is not a “bonus” product so it does NOT have huge expenses like the new Pac Life and Lincoln products.

What do you think? I like it. I like the option of offering an IUL that has no cap on returns, returns with a 200% multiplier (so even modest returns can generate high credited returns), and a VCI index that is managed  to reduce risk (which hopefully will increase returns in volatile times).

FYI, the index went live in July of 2016.

Roccy DeFrancesco, JD