Why Life Insurers Guarantee a Higher Rate of Interest on Single Premium Policies Than Their Other Policies

Life insurers, the insurance company receives the full premium that will be paid under the policy at the beginning of the contract. This permits it to invest the money in long-term assets with fairly certain or predictable long-term returns. These longer-term assets generally pay a higher yield than shorter-term investments. In addition, regulations permit the insurance company to base its reserve calculations on rates as high as 6 percent annually for single premium policies. The upper limit on assumed interest rates for reserve calculations is lower for policies with periodic premium payments.

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Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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