I was able to add the policy by placing the policy file in this location:
…/IntegrationServer/instances/default/config/wss/policies/
I have attached the policy file to be placed in this location. After you have done this, you may need to restart your server for the policy to reflect in designer.
After this, open the provider WSD in designer, click on policies tab, right click and select the username token policy you have just added and save. Your webservice is now secure with a username token policy.
#webMethods#soa#API-Management