How Are Life Insurance Interest Rates Credited?

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.

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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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Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit to join the GET READY! Financial Preparedness Club and access free resources.

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