Essentially akin to CAUL, a flexible premium product with the same concept of current versus guaranteed COIs, EIUL takes another step by offering the opportunity to participate in the equity markets with upside limits and downside protection. With EIUL, the carrier credits the cash value with the greater of a minimum guaranteed rate or a portion of the growth of a given index, such as the S&P 500. To be able to provide both a floor and a ceiling on the crediting rate, the carrier uses some part of the account (perhaps as much as 10 percent) to invest in an index straddle—put and call options on the selected index. Note that even though crediting may be based on the equity markets, the product is still a general account product.
The crediting methodology typically involves the measuring period of the return, the return of the selected index, the cap or portion of the index’s return that the carrier will apply in the crediting formula, the participation rate or percentage of the index’s return (subject to the cap) in which the policyholder will participate and the floor or the minimum guaranteed return the carrier will credit, which might be 0 percent.
Consider this example. A policyholder has selected the 1-year S&P 500 (without dividends). In this policy year, the index returns 15 percent. The participation rate is 100 percent, but the cap is 11 percent. Therefore, 11 percent is credited. If the index had returned 9 percent, the carrier would have credited all 9 percent because there’s 100 percent participation, and the cap is greater than the return. On the other hand, if the S&P had been down that year, the floor would protect the policyholder with a 0 percent return. Note that the carrier does charge expenses and COIs, so it’s not really a 0 percent return.
EIUL is arguably more complicated a product than the others discussed here. So, it’s critical for the policyholder to understand how the product works, which elements (for example, the participation rate and cap rate) are guaranteed and which ones the carrier can change and the impact of any such changes on performance and premium. Likewise, as with all products, the prospective policyholder should be provided with illustrations that assume different cap and participation rates, depending on which is guaranteed and which can be changed. Meanwhile, as noted earlier, some EIUL products can also offer death benefit guarantees similar to GUL. In short, EIUL can be appropriate when priorities are premium flexibility and the opportunity to benefit from performance of the equity markets with downside protection. As with any current assumption/performance-based product, regular monitoring is wise.