Hedging is the taking of two or more investment positions whose investment return(s) may counteract or limit the results of the other(s) based on market performance. A hedge may be achieved using many types of financial instruments, including stocks, options, exchange-traded funds, insurance, swaps, and futures contracts.
In the case of IUL, the policyholder accepts a limit (or cap) in the amount of potential investment gain in order to know that he will not incur a loss. Similarly, an uncapped strategy has unlimited upside potential with a zero floor, but a participation rate usually of less than 100% of any gain. (Back to IUL Table of Contents)