Why the IUL illustration you were shown in 2019 looks different today

An indexed universal life illustration is not a forecast. It is a regulated document showing what would happen if a set of assumptions held for decades. The rules governing which assumptions are permitted have been tightened repeatedly — and each tightening happened because the previous version was being worked around.

This matters practically. If you are holding a proposal from a few years ago and comparing it to one written this month, the difference between them may be mostly regulatory rather than a difference between the products.

How index crediting actually works

Three mechanisms do most of the work, and each limits how much of an index’s movement reaches your policy:

• Cap — an upper limit on the credited rate for the period.
• Participation rate — the percentage of the index’s movement that is counted.
• Spread, margin or asset fee — an amount subtracted from the index movement before crediting.

And a floor, typically zero, means a negative index period credits zero rather than a loss. The NAIC’s own consumer language describes the trade directly: these terms “describe ways the amount of interest added… may not reflect the full change in the index. But if the index goes down over that period, zero interest is added.”

Two things to understand about the floor. First, caps, participation rates and spreads are almost always non-guaranteed and adjustable by the carrier, subject to a contractual guaranteed minimum — so the guaranteed minimum cap or participation rate is what was actually promised, not the current one. Second, a zero floor applies to the index credit, not to the policy. Policy charges continue to be deducted, so account value can still decline in a year that credits zero. That is a mechanical consequence of how the product works, and it should be on the table when you review an illustration.

The regulatory timeline

AG 49 (2015–2017). Established a uniform method for the maximum illustrated crediting rate and earned interest rate, restricted illustrated policy loan leverage, and required supplemental disclosures including a side-by-side illustration. Phased in from September 2015 through March 2017.

AG 49-A (December 2020). Applies to policies sold on or after 14 December 2020. It capped the maximum illustrated rate for the benchmark index account at 145 percent of the annual net investment earnings rate, limited illustrated loan arbitrage to no more than 50 basis points above the stated loan interest rate, and — importantly — brought bonuses and multipliers inside the illustrated-rate constraint rather than leaving them outside it.

The “benchmark index account” that all of this is measured against is deliberately plain: S&P 500 basis, an annual cap, 100 percent participation, a 0 percent annual floor, and no bonuses, multipliers or other enhancements.

The 2023 revisions (often called “AG 49-B”). A naming note first: there is no NAIC guideline called AG 49-B. It is an industry nickname for the 2023 revisions to AG 49-A, which apply to policies sold on or after 1 May 2023. They standardized illustrated rates within a product — all indexed accounts sharing a hedge budget must illustrate at the same maximum rate. That closed the workaround of carving out an attractive proprietary index account or a fixed bonus in order to show a higher number.

The 2025 revisions (April 2026). Adopted in November 2025 and applying to policies sold on or after 1 April 2026, these target the historical-performance displays that sit alongside the illustration. They cap the historical index display period at 25 years, prohibit backcast performance or historical averages exceeding the maximum illustrated rate, prohibit “tables nor disclosures that either explicitly or implicitly compare historical returns and maximum illustrated rates, such as a side-by-side presentation,” require a disclaimer that historical index changes are not indicative of future returns, and tighten “Historical Period” to the actual index inception date rather than that of component indices.

That last set is aimed squarely at the presentation technique of showing a modest illustrated rate next to a glowing twenty-year backtest of a proprietary index and letting the reader draw the connection.

One honest caveat: AG 49 and its revisions are NAIC guidelines. They bind insurers in a given state through that state’s adoption of the Life Insurance Illustrations Model Regulation and its actuarial framework. We have not independently verified Florida’s specific adoption vehicle for each revision, so we are describing the NAIC standard rather than asserting Florida law.

Tax treatment, stated precisely

This is where IUL is genuinely different from a brokerage account, and also where it is most often oversold.

• Death benefit. Under IRC § 101(a)(1), amounts received under a life insurance contract by reason of the insured’s death are generally excluded from gross income, subject to the transfer-for-value rule.
• Cash value growth. Not currently taxable while the contract remains a life insurance contract under IRC § 7702 and is not surrendered.
• Withdrawals from a non-MEC. Under IRC § 72(e)(5), included in income only to the extent they exceed your investment in the contract — basis first.
• Loans from a non-MEC. Not treated as a distribution.
• Surrender. Gain — amount received minus investment in the contract — is ordinary income. IRS Revenue Ruling 2009-13 addresses this directly.

The risk that gets least airtime

A policy carrying substantial loans that lapses or is surrendered can generate taxable ordinary income even though the owner receives little or no cash, because the outstanding loan is treated as an amount received. This follows from the interaction of IRC § 72(e) and the surrender rules. It is the single most consequential thing to understand about a heavily-borrowed policy, and it is rarely the headline of a sales presentation.

MECs, and the 7-pay test

IRC § 7702A: a contract entered into on or after 21 June 1988 that fails the 7-pay test becomes a modified endowment contract. The test, broadly, is whether cumulative premiums paid in the first seven contract years exceed the sum of net level premiums for a contract paid up after seven level annual payments.

If it becomes a MEC, the tax treatment inverts: distributions become income-first under § 72(e)(10), loans and pledges are treated as distributions, and § 72(v) adds a 10 percent additional tax on the includible portion unless an exception applies — age 59½, disability, or substantially equal periodic payments.

Two further mechanics catch people out: a reduction in benefits within the first seven years re-tests the contract at the reduced level, and a material change — including an increase in death benefit — restarts the seven-year clock. Once a contract is a MEC it stays one, and exchanging it produces another MEC. MEC status does not affect the income-tax exclusion of the death benefit.

What to ask when someone shows you an illustration

• What is the guaranteed minimum cap and participation rate — not the current one?
• Show me the guaranteed column, run at guaranteed charges and the guaranteed minimum crediting rate.
• What happens if I stop funding it in year seven? In year twelve?
• If this is a loan-based income strategy, show me what happens if the policy lapses with the loan outstanding.
• Is this contract at risk of becoming a MEC at the funding level you are proposing?

A well-built IUL does specific jobs well for people whose situation fits it. The product is not the problem. The illustration is where the trouble usually starts, which is why the NAIC has now tightened the rules four times.