What is Crediting Method?
Crediting method is the formula or process an insurance company uses to determine how interest is applied to the cash value component of certain life insurance policies, most commonly indexed universal life (IUL) insurance. This method ties interest earnings to the performance of a specific market index, such as the S&P 500, but does not directly invest in the index itself.
The crediting method influences how much growth the policyholder’s cash value will experience over time. Insurance companies typically use one of several methods, such as annual point-to-point, monthly point-to-point, or a high-water mark strategy.
For example, the annual point-to-point method compares the index value at the beginning and end of the policy year to calculate interest. The monthly point-to-point method averages monthly changes in the index over the policy year, while the high-water mark method uses the highest index value during a set period to determine earnings.
The chosen crediting method directly impacts the policyholder’s potential for cash value growth. While most methods include caps (limits on the maximum return), floors (minimum guaranteed interest), and participation rates (the percentage of the index’s growth credited to the policy), they offer varying levels of growth potential and risk mitigation.
Understanding the crediting method is crucial for policyholders seeking to maximize the growth of their policy’s cash value while managing market-related risks.