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Let’s briefly explain the basic mechanics of an index crediting method against the raw performance of an index like the S&P 500.

In the first year, the S&P 500 earns 100% of what the S&P 500 earns. The IUL policy is capped on the upside potential, so in this example it earns about 30% less than the raw market. In the second year, the S&P 500 drops back down, since the market can move both up and down.

The IUL does not experience the loss in a down year, and locks-in the prior year’s gains.
If in the third year the S&P 500 once again goes up, both lines go up, and the annual reset allows the IUL policy to ride the index up.

You can see in the chart above how avoiding the market losses can make an impact after down years.