A very basic way to understand how Indexed Universal Life (IUL) credits interest is to think of it like a very simple game where you flip a coin 10 times. There are then two ways to play the game.
In Game 1 you win $100 for every head, and lose $100 for every tail.
Game 2 awards you $70 for every head, but you lose nothing for every tail.
In the chart above you can see how this game plays out in four different market conditions.
In the bull market condition, 80% of the flips are heads, and 20% of the flips are tails. Obviously in a bull market, choosing Game 1 is marginally better than Game 2.
In a bear market, where the conditions are the exact opposite of the bull market, 20% of the results are heads and 80% of the results are tails. In this market scenario, Game 2 is dramatically better than Game 1.
Next is a flat market and you win 50% of the time and lose 50% of the time. Again, in this market, Game 2 outperforms a simple break even of Game 1.
Last we have the likely market, where 70% of the time you get heads and 30% of the time you get tails. Again in this scenario Game 2 fares better.
So, for those clients who would rather have a chance at winning something, but not risk loss, the indexed crediting method (Game 2) makes sense.