How Life Insurance Is Affected By Rising Interest Rates

Founding member of Verite Group, LLCspecializing in premium finance, with 40 years of life insurance experience.

With interest rates climbing, many investors are wondering how this will impact their financial portfolios, including their life insurance. The Federal Funds rate was 1.00% on June 9, and it is expected to climb to at least 2.62% by the end of the year in response to recent inflation.

The impact of rising interest rates can be directly correlated to the performance of many asset classes. For instance, when interest rates increase, the rates of treasury notes tend to increase where the price of fixed-rate bonds decline. But what about the performance of a cash value life insurance policy such as a whole life, universal life (UL) or indexed universal life (IUL) policy? Should a policyholder expect a policy’s crediting or dividend rate to move in tandem with interest rates? The answer is “yes”—but not right away and, with some types of policies, not for a while.

Your Existing Policies

A whole life or universal life policyholder can benefit from rising interest rates in the way of an increase to a policy’s dividend rate or crediting rate, respectively, in a few ways. First, the insurance company must benefit from greater returns from their investment portfolios where premiums are invested. In many situations, there could be a lag before these portfolios are able to invest the new money in the higher rate environment and pass along investment gains to policies. This may also assume that the carrier’s expenses and mortality costs/charges remain stable or decrease in order to receive the appreciation of higher returns.

Over the last several years, as interest rates have fallen and remained at historic lows, carriers were forced to adjust to the environment by lowering policy dividends and

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