1. FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC
Index Interest Crediting Explained How is IUL protected against market volatility?
Today we’re going to discuss, in the simplest possible terms, the value of index interest crediting and how it helps protect policy values from market volatility.
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FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC
AIG is the marketing brand for policies issued by American General Life Insurance Company and The United States Life Insurance Company in the City of New York, member insurance companies of American International Group, Inc. Guarantees backed by the claims-paying ability of the issuing insurance companies.

2. How does Index Interest Crediting work?
S&P 500®
Here’s how:
IUL cash value growth is tied to the performance of an underlying index (e.g. S&P 500®)
First, let’s review the basics. Index Universal Life insurance policies accumulate cash value based upon the performance of an underlying index for a specific period of time (e.g., one year). As such, IULs can provide greater potential for cash value accumulation than a traditional universal life policy.
Here’s how:
The growth of the cash value is tied, generally, to the performance of one or more indices, such as the S&P 500®. An index tracks the movement of a group of financial instruments, like stocks or bonds. The S&P 500®, for example tracks the performance of 500 large, publicly traded companies in the United States. Check out the changing index from 1998 to 2017.
To simplify the example, let’s zoom in on the first two years, from 1998 to and from 1999 to 2000.
Index Universal Life provides the potential to increase cash value through index interest crediting accounts. It is not an investment. Clients are not invested in any security and cannot invest in an index directly. Past performance is not indicative of future results.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

3. How does Index Interest Crediting work?
S&P 500®
Here’s how:
1200
1250
1300
1350
1400
1450
1500
1998
1999
2000
IUL cash value growth is tied to the performance of an underlying index (e.g. S&P 500®)
Here we see the index rise in the first year, then drop in the second.
Index Universal Life provides the potential to increase cash value through index interest crediting accounts. It is not an investment. Clients are not invested in any security and cannot invest in an index directly. Past performance is not indicative of future results.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

4. How does Index Interest Crediting work?
S&P 500®
Here’s how:
1200
1250
1300
1350
1400
1450
1500
1998
1999
2000
20%
10%
An index is subject to market ups and downs – volatility
In an index, greater growth opportunity can mean greater volatility
The performance of the index is subject to the ups and downs of the underlying securities. In this example, the S&P 500® rose nearly 20% in and then dropped 10% in This change is known simply as market volatility.
Oftentimes, the greater the growth opportunity in an index, the greater the volatility.
Index Universal Life provides the potential to increase cash value through index interest crediting accounts. It is not an investment. Clients are not invested in any security and cannot invest in an index directly. Past performance is not indicative of future results.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

5. How does Index Interest Crediting work?
20%
10%
IUL Index Interest Account
1998
1999
2000
1200
1250
1300
1350
1400
1450
1500
1998
1999
2000
20%
10%
S&P 500®
Here’s how:
IUL index interest crediting strategies reduce volatility in the index interest account
By tracking the performance of an index, versus directly investing in the market, an IUL can allow for cash value accumulation and can protect from market downturns (since there is no actual investment). Let's see how...
Index Universal Life provides the potential to increase cash value through index interest crediting accounts. It is not an investment. Clients are not invested in any security and cannot invest in an index directly. Past performance is not indicative of future results.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

6. How does Index Interest Crediting work?
IUL Index Interest Account
Here’s how:
20%
12%
20%
10% 0%
IUL accounts share in index’s up years and none of the down ones
The share of the upside will depend on the selected crediting strategy
Index Interest Accounts provide the potential for index interest to be credited in years when the underlying index is up, and never less than zero interest credited when the index is down. The index interest credited will depend on the performance during the crediting period and index interest crediting strategy elected.
While negative interest will not be credited, it is important to understand that an account will experience no interest crediting during down years.
1998
1999
2000
Index Universal Life provides the potential to increase cash value through index interest crediting accounts. It is not an investment. Clients are not invested in any security and cannot invest in an index directly.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

7. How does Index Interest Crediting work?
IUL Index Interest Account
Here’s how:
20%
12% 0%
Upside potential with
downside protection!
This combination give you upside potential with downside protection! Now lets look a bit closer.
1998
1999
2000
While the impact of market downturns will never be less than zero, upside potential is limited by rate caps or participation rates, depending on the index interest crediting strategy selected.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

8. How do insurances companies do this?
Imagine a typical savings account…
BANK
Invests in and receives
interest and dividends
MONEY
MARKET
Instruments
Value of investments can grow or shrink
Credits account with monthly interest %
Amount credited can increase or decrease
SAVINGS ACCOUNT
SAVINGS ACCOUNT
Value of account can NEVER SHRINK
How, exactly, does an insurance company offer upside potential and downside protection inside an IUL insurance policy? Is it magic? No, but it is innovative.
Maybe the best way to explain it is to think of a savings account at a local bank. On regular intervals (usually monthly), the bank will credit the account with an interest payment. That interest payment is tied to the bank’s money market investments. Account holders are not actually investing in these money market investments when they deposit money in a savings account, but the amount of interest credited to the account each month is tied to the bank’s investments.
The interest that is earned can go up when money market rates are up and go down when they are down, but at no time will the account balance get smaller – it never loses money due to the performance of the market. During low interest rate environments, the savings account just won’t grow as fast as at other times.
PROTECTED AGAINST VOLATILITY
Note: This is not intended to suggest than an IUL policy and the index interest crediting accounts are equivalent to a savings account. See the Notes section for more information.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

9. How do insurances companies do this?
Now, imagine similar protection within an insurance policy…
INSURANCE
SAVINGS ACCOUNT
BANK
Invests in Equities Seeking Returns from Positive Performance
Invests in and receives
interest and dividends
MONEY
MARKET
Instruments
EQUITY
MARKET
Instruments
Value of investments can grow or shrink
Credits account with annual interest
Credits account with monthly interest %
Amount credited can increase or decrease
SAVINGS ACCOUNT
INDEX INTEREST ACCOUNT
PROTECTED AGAINST VOLATILITY
PROTECTED AGAINST VOLATILITY
Value of account can NEVER SHRINK
due to market performance
First, it's important to understand that Index Universal Life policies and Index Interest Crediting accounts are not savings accounts.
Now, imagine a life insurance policy whose interest rate is tied to the performance of the stock market rather than the performance of money market instruments. Using market indices (such as the S&P 500®) to track the stock market’s performance, insurance companies employ, as part of a product’s mechanics, innovative techniques to capture and pass on a portion of the market’s positive returns and none of the negative.
Generally speaking, the higher the growth of the index, the greater the interest that is credited to index account. If, on the other hand, the index goes down, there’s simply no interest credited to the account. You either receive interest payments or, in the worst case, you do not.
This account cannot lose money due to negative market performance – upside potential with downside protection. Of course, policy fees and expenses can reduce account values.
Note: This is not intended to suggest than an IUL policy and the index interest crediting accounts are equivalent to a savings account. This is simply a demonstration of how an account holder can be protected against market volatility. Savings accounts held at a bank are backed by the Federal Deposit Insurance Corporation or, in the case of a credit union, by the National Credit Union Administration. IUL policies and any guarantees associated with them are backed by the claims-paying ability of the issuing insurance company.
Note: This example is not intended to suggest that an IUL policy and index interest crediting accounts are equivalent to a savings accounts. Savings accounts are insured by the FDIC, not subject to fees, and liquid. IUL contracts are backed by the claims-paying ability of the issuing insurance company, subject to fees/expenses and may be subject to withdrawal fees. Policy charges/fees will reduce the account value. Please see the Notes section for more information.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

10. To understand index interest crediting, let’s start with an Index
Let’s look at a volatile 15 years in the S&P 500®:
Markets were impacted by 9/11, the Dotcom Bubble Burst, and the Great Recession
If you had $100,000 invested in the stocks listed in the S&P 500®
Original Investment
Beginning Value:
$100,000
Ending Value:
$145,041
Rate of Return:
2.5%
MARCH 1994 – MARCH 2009
S&P 500® Index
MARCH 1994 – MARCH 2009
S&P 500® Index 6%
29%
24%
35%
22%
13% -
21% 1%
33% 7%
10%
47% 0%
-50%
-40%
-30%
-20%
-10%
These are the returns for those years
Let’s start by taking a look at a tough period of years. Looking at the chart, you can see that the 15 years beginning in 1994 view contains deep canyons and a harrowing cliff at end. September 11th, followed by the bursting of the Internet bubble, then a few years later the ‘Great Recession’ hits.
This chart reflects the annual returns for those years. They fluctuated from a high of 35% in 1997 to a low of -47% in 2008 – meaning that someone who was invested in the stocks tracked by the S&P 500 would have lost almost half in that year!
Hypothetically, let’s say someone has $100,000 invested in stocks tracked by the S&P 500® (an index that follows 500 large, publicly-traded US companies).
The hypothetical $100,000 has grown to only $145,000 – less than 50% more than they started with. This equates to a 2.5% annual rate of return.
Now, let’s see how the hypothetical $100,000 might have fared if it was inside an index interest account.
Note: The S&P 500®Index is a broad-based, market-cap weighted index of 500 U.S. stocks. Clients cannot invest in an index directly. This hypothetical scenario assumes a single sum is invested in March, 1994 and held until March, No fees, charges or taxes are reflected and, if they were, they would reduce the amount shown and the rate of return. Dividends were not included or reinvested. Past performance is not indicative of future results.
1994
2009
2004
1999
S&P 500® Index
This is a hypothetical scenario and does not reflect the performance or result of any product or index interest crediting account. No fees, charges, or taxes are reflected and, if they were, they would reduce the amount shown. Dividends were not included or reinvested. Past performance is not indicative of future results. Clients cannot invest directly in an index.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

11. Watch index interest crediting in action!
Let’s take a look at hypothetical index interest crediting for that period:
Original Investment
Beginning Value:
$100,000
Ending Value:
$145,041
Rate of Return:
2.5%
Index Interest Account
Ending Value:
$284,000
Interest Credited:
7.2%
MARCH 1994 – MARCH 2009
S&P 500® Index
MARCH 1994 – MARCH 2009
S&P 500® Index 6%
29%
24%
35%
22%
13% -
21% 1%
33% 7%
10%
47% 0%
-50%
-40%
-30%
-20%
-10%
Let’s share in
60% of the growth in good years and none of the bad…
If our hypothetical $100,000 were inside an Index Interest Crediting account – sharing in a part of the good years and none of the bad – what would be the impact? If the product that offers the index interest crediting account offers a 60% participation rate on March 30, 1994 and thereafter, this account would receive index interest equal to 60% of the positive movement in up years and 0% in down years. In 2009, our hypothetical account value grows to $284,000!
Rather than a 2.5% annual rate of return, the Index Interest Crediting account results in a 7.2% crediting rate!
Remember, this hypothetical scenario assumes a single sum is allocated in March, 1994 and held until March, Clients cannot invest in an index directly. No fees, charges or taxes are reflected and, if they were, they would reduce the amount shown and the interest credited percentage. Dividends were not included or reinvested. Past performance is not indicative of future results. Furthermore, the amounts shown in the hypothetical Index Interest Account are not representative of an actual IUL policy. This is a simplified demonstration of how the interest crediting strategies can help protect against a down market. An actual IUL policy account will have expenses and charges for the insurance component – which are not reflected here.
1994
2009
2004
1999
S&P 500® Index
Index Interest Crediting
This index interest account example assumes $100,000 allocated to a hypothetical index interest account on 12/31/94 and assumes a participation rate of 60%, reset at 60% on each anniversary. Participation rates are not guaranteed and may be higher or lower than the initial rate. It does not reflect the performance or result of any product or index interest crediting account. No fees, charges, or taxes are reflected and, if they were, they would reduce the amounts shown. For the S&P 500® component, dividends were not included or reinvested. Past performance is not indicative of future results. Clients cannot invest directly in an index.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

12. Watch index interest crediting in action!
There are, generally, two strategies of index interest crediting:
1. Participation Rate Strategy (shown in the previous example)
• Share in a percentage (e.g., 60%) of the positive years
• Negative years are protected by a guaranteed minimum interest rate (e.g., 0%)
2. Cap Rate Strategy
• Share in 100% of the positive years’ growth up to a “cap” (e.g., 9%)
If the Sample Index
Grows/Declines…
(60%) Strategy
(9%) Method
7.5%
4.5%
15.0%
9.0%
30.0%
18.0%
-10.0%
0.0%
Generally speaking, insurance companies offer two ways to credit interest to an index interest account. We have been describing the one known as the PARTICIPATION RATE strategy, where the negative years are protected by a guaranteed minimum rate (for example, 0%) and the positive years share in a percentage (e.g., 60%) of the growth.
The other is known as the CAP RATE strategy. Just like the Participation Rate strategy, negative years are protected by a guaranteed minimum rate (for example, 0%) . The positive years, however, share in 100% of the growth until that growth reaches a certain percentage, then the amount of interest credited is capped.
Let’s imagine a Participation Rate of 60% and a Cap Rate of 9%. If the Index were to have a 7.5% year, then the Cap Rate account would receive the full 7.5%, while the Participation Rate account would receive 4.5%. If, however, the Index were to experience an excellent year at 30%, the Participation Rate account would benefit up to 18%, while the Cap Rate account would experience its maximum rate of 9%. Of course, both strategies protect the account against the negative years.
It’s important to note that the above participation and cap rates shown are for example only and do not reflect any specific product or index interest crediting account. Participation and Cap rates are generally set at contract issue for a specific index interest crediting period and subject to change upon contract anniversary. Please refer to the product contract for details.
The above participation and cap rates above are for example only and do not reflect any specific product or index interest crediting account. Participation and Cap rates are generally set at contract issue for a specific index interest crediting period and subject to change upon contract anniversary. Refer to the product contract for details.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

13. Watch index interest crediting in action!
There are, generally, two strategies of index interest crediting: 6%
29%
24%
35%
22%
13% -
21% 1%
33% 7%
10%
47% 0%
-50%
-40%
-30%
-20%
-10%
Index Interest Account
Ending Value:
$284,000
Rate of Return:
7.2%
Original Investment
Beginning Value:
$100,000
$145,041
2.5%
1994
2009
2004
1999
S&P 500® Index
MARCH 1994 – MARCH 2009
Participation Rate Method
Ending Value:
$284,000
$224,000
Rate of Return:
7.2%
5.5%
Let’s see the 9% cap rate in action…
In the 1994 chart, you can see that the Participation Rate is greater than the Cap Rate in 5 years while the Cap Rate is greater in 6 of the years. The four negative years are, of course, tied.
Even though the Cap Rate offers greater performance in more years than the Participation Rate, the Participation Rate shared a much larger portion of the returns in the really good years.
The end result? The Participation Rate performs better in this scenario. There can be many scenarios where the Cap Rate strategy will outshine the other. This can occur when there are many positive years that are not hugely positive. Note that the Cap Rate outperformed in any year where the S&P 500® is less than 15%. Both strategies have their pluses and minuses.
Remember, this hypothetical scenario assumes a single sum is invested in March, 1994 and held until March, Clients cannot invest in an index directly. No fees, charges or taxes are reflected and, if they were, they would reduce the amount shown and the rate of return. Dividends were not included or reinvested. Past performance is not indicative of future results. Furthermore, the amounts shown in the hypothetical Index Interest Account are not representative of an actual IUL policy. This is a simplified demonstration of how the index interest crediting strategy can protect against a down market. An actual IUL policy account will have expenses and charges for the insurance component – which are not reflected here.
This example assumes the participation rate and cap rate remain unchanged during the timeframe shown. Participation Rates and Cap Rates are subject to change during the life of a contract. This example is not intended to position one strategy over another. Results will vary.
Cap Rate Method
This is a hypothetical scenario and does not reflect the performance or result of any product or index interest crediting account. No fees, charges, or taxes are reflected and, if they were, they would reduce the amount shown. Dividends were not included or reinvested. Past performance is not indicative of future results. Clients cannot invest directly in an index. This example assumes the participation rate and cap rate remain unchanged during the timeframe shown. Participation Rates and Cap Rates are subject to change during the life of a contract. This example is not intended to position one strategy over another. Results will vary.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

14. Index account strategy options
Various crediting strategies may be available:
Participation Rate and Cap Rate blends
Multiple indices (e.g. an equity index and a bond index)
Some indices are domestic; others are international
But they all have one thing in common…
Now that you learned about Participation Rate and Cap Rate strategies, and seen them working on the S&P 500, let’s briefly discuss some variations that you may find:
Depending on the IUL product being considered, various index interest crediting strategies may be available
In addition to the Cap Rate and Participation Rate strategies, there may be strategies that blend these two
Some index interest crediting strategies involve more than one index (such as a combination of an equity index and a bond index) to help further mitigate volatility
Some strategies may focus on domestic indices, while other look at international indices
But they all have one thing in common…upside potential with downside protection.
Upside potential with
downside protection!
Index interest crediting accounts are protected from negative index interest. Account value will be reduced due to policy fees and expenses.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

15. FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC
AIG offers two innovative IUL options
Max Accumulator+ IUL
Accumulation-focused
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Protection-focused
Visit one of our producer sites:
for IUL-specific sales support, product information, and training
for generation-specific information and sales concepts
to provide retirement support and supplemental income to your clients
[Discuss product options and our support websites]
Policies issued by American General Life Insurance Company (AGL), Houston, TX , ICC , 16760, ICC Issuing company AGL is responsible for financial obligations of insurance products and is a member of American International Group, Inc. (AIG). AGL does not solicit business in the state of New York. Products may not be available in all states and product features may vary by state. Guarantees are backed by the claims-paying ability of the issuing insurance company.
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC

16. FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC
Thank you!
Thank you!
Policies issued by American General Life Insurance Company (AGL), Houston, TX except in New York, where issued by The United States Life Insurance Company in the City of New York (US Life). Issuing companies AGL and US Life are responsible for financial obligations of insurance products and are members of American International Group, Inc. (AIG). Guarantees are backed by the claims-paying ability of the issuing insurance company. Products may not be available in all states and product features may vary by state. Please refer to your policy.
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FOR FINANCIAL PROFESSIONAL USE ONLY. NOT FOR USE WITH THE PUBLIC