18 Jul Cash value insurance and interest rates

Q. With interest rates going up, is there a way to make sure my insurance policy’s investments will benefit from that? I have a guaranteed 4.75 percent on a permanent policy.
— Policyholder

A. Your question is an important one because there are many variations of “permanent” life insurance policies.

Because there are so many, it’s common for the mechanics to be misunderstood.

To get some clarity, we went to Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

He started with Universal Life (UL) policies, which typically charge more than term rates. The insurance company invests the additional money into some new money vehicle, such as a money market fund or Certificate of Deposit (CD), he said.

Gaelick said you have no control over this.

“With these types of policies, current and future interest rates will affect the accumulated cash value,” he said. “The higher interest rates are, the more the cash value of these funds will grow.”

And, he said, many UL policies have a guaranteed interest rate regardless of the current interest rates available.

Then there are Variable Life (VL) policies, which also charge more than term rates. The insurance company invests the additional money into mutual funds, Gaelick said.

“You typically have complete control — from the funds they offer — over which funds go into the investment account,” he said. “With these types of policies, the market performance of these funds will affect the accumulated cash value.”

The better the performance, the more the cash value of these funds will grow.

Gaelick said one of the choices of the funds available may be a “new money” account such as a money market account. If chosen, he said, current interest rates will affect the performance of the investment account.

Whole Life (WL) from a mutual life insurance company is very different, Gaelick said.

“Current accumulated values are basically an `account’ that is not affected by current interest rates or the stock market,” he said. “However, interest rates and the market affect the insurance company’s profits — and thus dividends — which may affect the performance of a WL policy.”

Gaelick cautions that because there are so many variations of policy types and many ways to design a plan, it’s always advisable to consult with an experienced insurance advisor with your specifics.

Email your questions to .

This post was first published in July 2017.