The term “floor rate” in IUL refers to a bottom-end earnings capacity for your cash value inside an indexed universal life insurance policy.
Unlike a raw market index like the S&P 500, which can experience negative returns in any given year, the best performing IUL policies offer either a 0% or 1% floor rate. Even though the cost of insurance is still applied after earning 0%, the erosion of cash value will be nominal compared to a major correction from a market index.
The top IUL carriers of 2020 with the best performing IUL policies will either have some sort of cap on your potential index crediting in any given year. Some of the best indexed universal life companies even offer uncapped crediting strategies still with your 0% floor rate to protect against major downside moves.
Having at least a 0% floor rate is so important because of the annual reset you get for your growth parameters. With a 401(k) if the S&P 500 index crashes in any given year, the index would have to make up all that lost ground before you get any positive growth. With IUL’s 0% floor rate and crediting strategies that reset annually, you simply would get no crediting in that down year, but a new lower starting point from which to earn growth the following year.
You can learn more about this “annual reset” advantage of an IUL vs. 401(k) in our indexed universal life pros and cons article.
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