Have you heard anybody talk about what's happening in the market, the ups and the downs? The stock market's going up, the stock market's going down. It's actually lately been going down and down and down. And you've heard anybody talking about how happy they are about that? No, not really. Right.
There are a lot of people that aren't as upset as other people that are in the market are. And that is because they're using the power of index based products. They're both annuities and life insurance that use an indexing strategy. And the great thing about the indexing strategy is your account can never go down. It can only go up.
And why that is so important and so incredibly special in this type of of an economic market is because when the market goes down, you earn zero, which right now versus 10, 15, 20% down is a tremendous gain. But when the market goes up, you go up. So let me let me put it in the perspective of a math question. If you have oh, let's just say you have $1,000 in an account and then in the first year, you lose 20% in the market. Now you have how much? $800. Right?
The next year you make 20%.How much money do you have? Well, a lot of people instantly will say, well, I'm back to $1,000. Right. Well, no, you made 20% on $800, not 20% on on the thousand dollars. So you only have $960 in that account. So that is that is what happens in a lot of investment accounts and why the rates of return are a little bit skewed sometimes.
Another way of doing this is by putting this money into an index account. And again, it can be both in an annuity and it can be in a life policy is when you lose money in the market, we say the same. You get credited zero. When the market goes up, you participate. Now you might not make the full amount, but you're going to make up to a cap rate.And that cap rate is depending on where we are in the market is eight, ten, 11, 12%, depending on where we are.
So let's just assume it's 8%. And let's go back to your original. Original question is, if you had $1,000 and the first year you lost 20%, how much would you have in an index account? You'd have $1,000, right?Because you have you got credited zero. You didn't lose any. The next year you got credited. Let's say the cap is 8%. How much do you have now? $1080. Right.
Well, if you add those two together on the other side, you make 20%. But you're not even back to back to where you were to start with. And on the index account, you're up.The great thing about this strategy is you're always compounding, never rebounding. When you're in the market, you're often rebounding and just trying to get back to where you were.
One more thing about this, too, is on the IUL index, universal life side. Well, as that money accumulates, it accumulates tax deferred. When you take the money out of the contract, you can take it out tax free, which in today's environment where we all can pretty much agree that tax income tax levels are going to go up. That's a real important aspect of your income flow and retirement years. So the indexing strategy is another tremendous opportunity and benefit that life insurance policies and annuity contracts in this case can also give you.