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  • How are life insurance interest rates credited?
  • July 19, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    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.

    Interest rates for life insurance policy are credited using one of two general methods, which are the portfolio method or banned method.

    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.

    If you seek further assistance or additional information, please feel free to email me at

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

Creative Commons License
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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