Now we’ve discussed hypothetical assumptions about policy values, but what happens to initiate indexed interest crediting on an indexed life policy? First a premium payment is made by the policyholder. Although there are a few indexed whole life policies available which require a specified premium amount, most indexed life products’ premiums are flexible in nature because they are on a universal life chassis. There are a also a few single premium indexed universal life products available today, where only a single premium would be payable on the policy, and future premiums would not be accepted. However, the majority of indexed life plans are universal life plans and have flexible premiums. Policyholders have the option of rolling over another life insurance policy’s cash surrender value into their policy in a lump sum through IRS section 1035. In addition, the option for annual, quarterly, semi-annual and monthly premium payments is available. Most plans require that a minimum monthly premium must be paid in order to ensure that the policy will remain inforce for the basic no lapse guarantee period. On the other hand, premiums in excess of that amount are at the policyholder’s discretion.

Every insurance carrier handles premium administration on an indexed life policy a little differently. One major discrepancy amongst carriers is the frequency of “sweeping” for indexed buckets, or how often the insurer allows portion of the policy’s account value to be directed to an indexed strategy, for an indexed bucket to be created. This is an administrative issue that correlates directly to the frequency of option purchases and the administrative capabilities of the systems at the company. Statistics on sweeping frequency by insurance carriers are as follows:

1.	Monthly	56%
2.	Annually	15%
3.	Semi-monthly	15%
4.	Quarterly	7%
5.	Daily	7%

For example, let’s assume XYZ Insurance Company only allows indexed buckets to be created once annually on the policy anniversary. John purchased his policy on January 15th, but decides to make an off-anniversary lump sum payment on March 15th. The March 15th payment will sit in a holding account and collect interest at a fixed rate until the next policy anniversary when the policy will sweep for any new indexed buckets. At that time, John can make his annual premium payment if he wishes and his lump sum will create a new indexed bucket. Most insurance carriers with fixed strategies will allow voluntary allocations to those strategies to occur at any time- the client does not need to wait for sweeps to occur. Sweeps are intended to assist the insurance carrier with hedging efficiencies for the purchasing of their options for the participation rates, caps, and spreads/asset fees on the indexed-linked interest portion of an indexed life policy.

This story is fictional and does not portray any individual(s) or company(ies) nor any anticipated performance of any specific product.

Note that if the insurance carrier allows sweeping more than annually (off anniversary), each indexed bucket has it’s own anniversary in addition to policy anniversary. For example, let’s review the practices of ABC Life- an insurance carrier that sweeps for indexed buckets daily. Sarah is a policyholder who pays premiums through a bank draft on her indexed life policy that was issued on June 30th. She has opted for her premiums to be deducted from her bank account on the 20th of each month. When her policy is issued, she pays an initial premium and her first indexed bucket is created. Let’s take a look at Sarah’s payment history for the first year of her policy:

Event	Sweep Date	Participation Rate/Cap
Policy Issued	June 30th, 2005	100%/12.00%
Monthiversary 1	July 20th, 2005	100%/12.00%
Monthiversary 2	August 20th, 2005	100%/12.00%
Monthiversary 3	September 20th, 2005	100%/13.00%
Monthiversary 4	October 20th, 2005	100%/12.00%
Monthiversary 5	November 20th, 2005	100%/11.00%
Monthiversary 6	December 20th, 2005	100%/11.00%
Monthiversary 7	January 20th, 2005	100%/11.00%
Monthiversary 8	February 20th, 2005	100%/11.50%
Monthiversary 9	March 20th, 2005	100%/11.50%
Monthiversary 10	April 20th, 2005	100%/12.00%
Monthiversary 11	May 20th, 2005	100%/12.00%
Policy Anniversary	June 20th, 2005	100%/12.50%

This story is fictional and does not portray any individual(s) or company(ies) nor any anticipated performance of any specific product.

As you can see, Sarah’s policy has twelve different indexed buckets at the time of her first policy anniversary. In addition, she has five different caps applying to those twelve buckets. This is another disparity between traditional whole life and traditional universal life and indexed life products. Although some may see it as a complex feature, it can be beneficial to the policyholder because they benefit from having the ability to consistently participate in the potential growth of the index, rather than waiting on the sidelines. What if a policy only sweeped for indexed buckets once annually and the market declined over that one-year period? A similar policy that sweeped monthly or daily would give a client paying monthly the ability to take advantage of the changing market twelve different times over that one-year period. So, the market may have been down over that first particular one-year segment, but perhaps the next month’s one-year segment was a gain. Frequency of sweeping has become a competitive feature on indexed life products today due to this point, as some carriers liken it to dollar cost averaging.

So, depending on the crediting method, a number of things may be recorded after the policy sweeps for the indexed bucket. If it is a monthly point-to-point strategy, values of the index will need to be tracked each month, despite the fact that interest will not be credited until the end of a one-year period. The same can be said of monthly averaging strategies. Daily averaging strategies track values for every day the market is open, despite the fact that any potential indexed interest is not credited until the end of a one-year period. Two-year point-to-point methods merely record the value of the index on the day the indexed bucket sweeps, and on the next bucket anniversary (which is two years later). At that time, any potential interest is credited and the process starts over again for that bucket of premium. A similar process would occur for term end point crediting methods (any point-to-point strategies longer than two years).

One item that has caused confusion for many producers and policyholders alike is the timing of annual premium payments and potential indexed interest crediting. The cause for the perplexity is policyholders not seeing indexed interest from annual premium payments that are received after the policy anniversary. Annual statements run from policy anniversary to policy anniversary. However, indexed buckets have their own bucket anniversaries. If a policyholder should make a premium payment off-anniversary, they will not see any potential indexed gains from that indexed bucket until the next year’s annual statement. Let’s take a look at another case study:

Andrew bought an indexed life policy March 10th, 2004 from VWX Insurance and paid an initial premium at that time. The annual point-to-point policy swept for indexed buckets monthly on the policy monthiversary. In addition to his initial premium, Andrew was anticipating a 1035 exchange premium from a policy he owned at DEF Life shortly thereafter. He paid his April monthly premium, as the 1035 had not arrived by the time he received his premium notice. VWX did receive the 1035 exchange on April 30th. The large premium sat collecting fixed interest until May 10th, 2004 at which time the third indexed bucket on the policy was created. Andrew continued to pay regularly scheduled payments throughout the rest of the year. When he received his annual statement the following March 2005, he did not see any indexed gains from the 1035 exchange premium. When he called his agent, the agent explained that the bucket from the 1035 exchange was not created until two months after the policy anniversary. Because the bucket would not be a year old until May 2005, any potential gains from that bucket would be reflected on his next annual statement.

This story is fictional and does not portray any individual(s) or company(ies) nor any anticipated performance of any specific product.

Timing can also be an issue when it comes to monthly deductions on indexed universal life. Because the policy charges are automatically deducted from the cash values of a universal life plan, it is easy to leave a policy on “auto pilot.” However, it is important to make certain, particularly with indexed life policies, that the policyowner is not only paying but paying enough to cover those charges. If not, the policy’s cash value may start to decline despite the fact that premiums are being paid. In addition, indexed buckets may stop being created because minimum insurance charges are not being provided for. Lastly, potential gains on existing buckets may be interrupted if insufficient cash value exists to fund the policy, although most insurance carriers deduct any policy charges from fixed account allocations prior to indexed account allocations. Any indexed interest is credited on the cash value after policy charges are deducted, making annual appointments with policyowners an important tool for policy preservation and performance.

One option that a client has on any indexed life with more than one premium allocation option is the ability to change future premium allocations. Ordinarily, all future premium payments will be directed as was indicated at policy application, or as the policyholder indicated in their last written correspondence. However, the policyholder can write the company to change future premium allocations if they wish to make a change (some companies limit the frequency to once a month or less). Keep in mind that if indexed buckets are created less frequently, i.e. annually, a change in premium allocation off-anniversary will not be reflected until months later at policy anniversary. A couple of companies even offer dollar cost averaging programs on their indexed life policies.