- How Are Life Insurance Interest Rates Credited?
- June 13, 2017
Declared Interest Rate – for any traditional, non-variable policies – is the amount that the investment committee of a life insurance company determines how much can be credited towards in-force life insurance policies, which the policy owner must accept.
Interest is usually credited on the accumulated value after policy expenses (mortality/risk charges and overhead expenses) have been deducted, so the actual return is less than the credited rate.
Life insurance companies generally adopt one of two general interest-crediting methods that are in widespread use throughout the industry, which are the portfolio method and the banded method.
Under the former system, the company credits interest to in-force policies based on a percentage of the earnings on the company’s entire investment portfolio.
Under the banded system, interest credited is based on the actual performance of specific pools or buckets of money that are received by the company at different times and invested at current market conditions.
Since interest rates rise and fall over time, different buckets earn different interest rates. Neither the portfolio nor the banded interest rate system can claim overall superiority.
In fact, over long periods of time, the two systems tend to even out, yielding somewhat similar results.
Since a permanent life insurance policy should not be bought for a temporary need, the long-term nature of such contracts tends to make it somewhat less important whether the company uses the portfolio or banded system.
Equity Index Return Rate
The rate of return is dependent upon the performance of the selected index (or indices), the participation rate, and type of crediting method selected.
Market Rate (for variable policies)
On variable life and variable UL policies, the policy owner directly bears the investment risk. That’s because the policy owner is in a position to choose specific investment sub-accounts.
Usually, funds may be moved between the investment sub-accounts, sometimes with some restrictions.
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Steuer, author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, has more than 25 years of experience and holds the Department of Insurance Analyst License (LA) as well as the Charted Life Underwriter (CLU) designation. Tony holds various leadership positions and has authored three books on the topic of life insurance.
Steuer’s work has been awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy for his The Questions and Answers on Disability Insurance Workbook and The Questions and Answers on Insurance Planner. Forbes named Questions and Answers on Life Insurance: The Life Insurance Toolbook as one of their top nine great investment books.
He’s also the founder of the Insurance Literacy Institute and creator of The Insurance Bill of Rights designed to empower consumers and to identify members of the Insurance Industry dedicated to strong professional standards.
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