Honest Mechanics
How Indexed Universal Life Works in 2026: Caps, Floors, Participation Rates, and Cost of Insurance
The index crediting mechanic
Schematic diagram. Each segment represents one crediting period (typically one year). When S&P 500 is above the cap, your credit is capped. When the S&P 500 falls below 0%, your credit is floored at 0% (the floor only protects the index credit, not account value against COI and fee charges).
Cap rate
Maximum index credit in a period. Currently 8-12% across major carriers. Carriers can reduce the cap.
Floor
Minimum credit. Typically 0%. Protects the index credit, not your account value. COI and fees still deducted.
Participation rate
Percentage of index gain credited. 100% participation + 8% cap = credit min(8%, S&P gain). 150% participation = 1.5x the index gain up to cap.
Cost of insurance: the escalating charge nobody mentions
Every month, a cost-of-insurance (COI) charge is deducted from your account value. The COI is calculated as: (death benefit - account value) x mortality rate for your age x (1/12). As you age, the mortality rate increases. Late in life (post-65, post-70), the COI charge can increase dramatically. If the account value is low and the index is crediting 0% (a flat year), the COI charge can exceed the account value, triggering a lapse.
| Insured age | Approximate monthly COI (per $100k net amount at risk) | Annual COI (per $1M face, $200k account value) |
|---|---|---|
| 35 | ~$5-8 | ~$600-960 |
| 45 | ~$10-15 | ~$1,200-1,800 |
| 55 | ~$25-40 | ~$3,000-4,800 |
| 65 | ~$80-130 | ~$9,600-15,600 |
| 75 | ~$250-400 | ~$30,000-48,000 |
Approximate illustrative figures. Actual COI rates vary by carrier, policy design, and underwriting class. Net amount at risk = death benefit minus account value. Source: carrier policy documents and industry actuarial tables.
The premium structure: target vs minimum vs guideline
Target premium
High riskThe agent-quoted premium. Designed to look affordable. Often insufficient to sustain the policy long-term as COI escalates. Most policies sold at target premium are structurally at risk.
Recommended premium (50-100% above target)
Medium riskIndustry guidance (Witt Actuarial, FIG Marketing) suggests funding IUL at 50-100% above target premium to create an adequate buffer against COI escalation and cap-rate decline.
Guideline/maximum premium (near 7-pay limit)
Lowest policy riskMaximum funding without triggering MEC. This is the premium level for a high-earner using IUL as a tax-deferred savings vehicle. Creates maximum cash value buffer against COI.