Interest tied to an index, not invested in it.
Indexed universal life credits interest through a formula linked to a market index, inside limits the company sets. Here's how those limits work and what an illustration can and can't promise.
Quick answer Indexed universal life insurance is universal life whose cash value earns interest based on how an outside market index changes over a set period, without your money being placed in the index or the stock market.
- In indexed universal life, a participation rate sets the share of the index change that counts, a cap sets the most that can be credited, and some designs subtract a spread.
- An IUL floor protects the interest credit, not the account: policy charges keep coming out of the cash value, so the cash value can shrink in a flat or down year.
- IUL caps and participation rates are usually set for a period and can change afterward, within any minimums the contract guarantees.
- AG 49-A is an NAIC actuarial guideline that limits how insurance companies illustrate life policies with index-based interest.
- IUL policy loans that aren't repaid are subtracted from the death benefit, and a lapse or surrender with loans may be taxable.
By Sam Alishahi · CA Insurance License #4348151 · Reviewed November 2026 · How this page is researched
Caps, floors and participation rates
Indexed universal life is universal life whose cash value earns interest based on how an outside index changes over a set period. Your money isn't placed in the index or the stock market. The company applies a formula that usually passes along only part of the index change: a participation rate sets the share that counts, a cap sets the most that can be credited, and some designs subtract a spread. A floor, written into the contract, sets the lowest index credit for a period when the index falls.
A floor protects the interest credit, not the account. Universal life charges keep coming out of the cash value, so in a flat or down year the value can shrink, and an underfunded policy can lapse. Caps and participation rates are usually set for a period and can change afterward, within any minimums the contract guarantees. The illustration you see is limited by NAIC's actuarial guideline for indexed products, AG 49-A, but it remains a projection, not a promise.
- Participation rateThe share of the index increase used to figure your interest credit.
- Cap rateThe most interest the account can be credited for an index period.
- FloorThe lowest index credit for a period. Policy charges are still deducted.
- SpreadA percentage some designs subtract from the index change before crediting.
What underwriters will ask
Having these ready means I can go to market on the first call. The quote form asks for the same things, and anything you don’t know yet can wait.
- Goal: a lifetime death benefit, cash value, or both, and which matters more.
- Premium: what you can pay each year, and for how many years.
- Time horizon: how long you expect to hold the policy before touching the cash value.
- Ages: the insured's date of birth.
- Existing coverage: term, permanent or group policies, plus any IUL illustration you've been shown.
- Advisors: your tax advisor or financial planner, if you'd like them in the conversation.
What AG 49-A actually limits in an IUL illustration
Actuarial Guideline XLIX-A (AG 49-A) is the NAIC guidance for illustrations of life policies that offer indexed credits. It applies to new business and in-force illustrations on policies sold on or after December 14, 2020. It superseded AG 49, adopted in 2015 to bring uniformity to index-linked illustrations; the guideline notes that two illustrations using the same index and crediting method often showed different credited rates.
It sets the maximum crediting rate an insurer may illustrate, limits the loan leverage an illustration can show, and requires added consumer disclosures.
The rate limit starts with a Benchmark Index Account: an account based only on the one-year percent change in the S&P 500's index value, with an annual cap, a floor of zero, full participation, interest credited once a year, and no multipliers, bonuses or similar enhancements. Its illustrated rate can be no higher than the lower of two tests: an average of rolling 25-year lookback results, and a limit tied to the insurer's net investment earnings rate on its general account.
Every other index account is held to the lowest of several tests, one of which is the benchmark's rate plus any supplemental hedge budget the account is funded with. For policies sold on or after May 1, 2023, a further test scales the limit by how the account's hedge budget compares with the benchmark's. The NAIC says the 2023 revisions were made to tighten illustration limits.
AG 49-A limits what an illustration may show; it does not set the caps or participation rates a policy will credit. In a proposal, I look for which account is the benchmark (or the hypothetical one the actuary had to construct) and how far each other account's illustrated rate sits above it.
The illustration changes for policies sold since April 1, 2026
The NAIC adopted a revision to AG 49-A on December 11, 2025. It changes what the basic illustration must show for policies sold on or after April 1, 2026; insurers may choose to follow it for policies sold as early as January 1, 2026.
- Side-by-side ledger stays. A ledger on the alternate scale must appear alongside the illustrated scale with equal prominence.
- Benchmark table. For the benchmark account, which may be a hypothetical one, only the minimum and maximum of its 25-year lookback averages are shown.
- Actual history, 25 years. Each index account gets a table of annualized actual index changes and the hypothetical credits current account terms would have produced, for only the most recent 25 years (policies sold before April 1, 2026 got 20).
- Young indices get no table. If an index has less than 10 years of history since its inception, no table is shown for it. From 10 to under 25 years, the table covers only that history.
- No other historical returns. Neither the basic nor the supplemental illustration may show other historical returns, or tables or disclosures comparing historical returns with maximum illustrated rates.
- Required statement. The illustration must say, in substance, “Historical index changes shown in this illustration are not indicative of future returns.”
NAIC Illustrations Working Group minutes from August 6, 2026 record a Texas regulator explaining that the Task Force decided only actual historical performance could be shown, not hypothetical or back-cast performance, and chose to stay with the 10-year minimum. If a newly launched index in your proposal has no history table, that is the rule working, not a missing page.
California's review-period rules are on California free-look and lapse notice rules.
Indexed universal life, answered
Is indexed universal life a stock market investment?
No. The cash value isn't invested in the index. The insurance company credits interest using a formula tied to the index's change over a period, and that formula usually counts only part of the change. You don't own shares, and you aren't credited the index's full gain.
How do caps and participation rates work together?
The participation rate decides how much of the index increase counts, and the cap limits the total credit. With a 100% participation rate and a cap, any gain above the cap is credited at the cap. With a participation rate below 100%, only that share of the gain counts. These rates are usually set for a period and can change, within any minimums the contract guarantees.
Can an IUL policy lose value?
Yes. The floor keeps the index credit from dropping below its minimum, but the cost of insurance and other charges are still deducted from the cash value. In a year with no index credit, the cash value can go down, and you may need to pay more to keep the policy in force.
What is AG 49-A?
An NAIC actuarial guideline that limits how companies illustrate life policies with index-based interest. It applies to policies sold on or after December 14, 2020, and was revised in 2023 to tighten illustration limits and in 2026 to add consumer disclosures. It limits the projection; it doesn't guarantee the result.
Can I borrow from the cash value?
Yes, at the loan rate in the policy. Loans that aren't repaid are subtracted from the death benefit, and if the policy lapses or is surrendered the result may be taxable. Talk to a tax advisor before relying on loans for income.
How is IUL different from a fixed indexed annuity?
Both credit index-linked interest using participation rates, caps or spreads. IUL is life insurance, with a death benefit and ongoing charges for it. A fixed indexed annuity is a contract built to accumulate money and pay you income, which can last for life.
Is indexed universal life a security?
FINRA says indexed universal life is generally not considered a security, while variable life and variable universal life are securities that must be registered with the SEC.
What is the alternate scale in an IUL illustration?
It is a second set of non-guaranteed values that AG 49-A requires alongside the illustrated scale. Its index credits are held below the illustrated scale's maximum rate and no higher than the fixed account's credited rate; if the policy has no fixed account, they are held to the average of the maximum illustrated rate and the account's guaranteed rate.
Can I get an updated illustration on my existing IUL?
Under the NAIC's illustration framework, after the first policy anniversary the insurer may provide, or the policy owner may request, periodic updates called in-force illustrations. How your state applies those rules varies by state.
Do you offer indexed universal life insurance outside California?
Yes. Clients across the country send the same quote form. Sam Alishahi is licensed in all 50 states and Washington, DC and places policies there directly. The shopping across carriers works the same way. Rules, minimums and markets differ by state — see insurance requirements by state.
Official sources
- NAIC: life insurance illustrations, AG 49 and AG 49-A for index-based policies
- NAIC: Buyer's Guide for Deferred Annuities (participation rates, caps, spreads and index crediting)
- California Department of Insurance: Life Insurance and Annuities guide (universal life, loans, surrender)
- New York Department of Financial Services: consumer alert on universal life policies (2019)
- NAIC Actuarial Guideline XLIX-A (revised, adopted December 11, 2025)
- NAIC Executive (EX) Committee and Plenary materials, 2023 Spring National Meeting (2023 AG 49-A revisions and project history)
- NAIC Insurance Topics: Life Insurance
- NAIC Life Insurance and Annuities (A) Committee materials, 8/12/26 (Illustrations Working Group minutes, Aug. 6, 2026)
- FINRA: Insurance (investor page)
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Alishahi Insurance · Saman Alishahi, independent insurance broker, California License #4348151. General information, not a quote or a promise of coverage; coverage depends on underwriting and the terms, conditions and exclusions of the policy actually issued.
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