Lewis & Ellis Inc.

A Guide to Interest Sensitive Whole Life Insurance

Life Insurance and Annuities
by Stephanie Crownhart
Interest sensitive life insurance can provide tremendous value for policyholders.
Interest sensitive life insurance can provide tremendous value for policyholders.

Interest sensitive whole life insurance refers to a policy that blends the protective benefits of traditional life insurance with the potential for cash value growth tied to prevailing interest rates. A policyholder is credited with interest that better reflects fluctuations in interest rates. This type of policy offers a flexible and dynamic approach to financial planning that other types of policies, such as term life insurance, do not match.

In this guide, we'll talk through interest sensitive life insurance, how it compares to other policies and different types of interest sensitive insurance.

Understanding interest sensitive life insurance

Interest sensitive life insurance is unique in that it combines elements of traditional life insurance with consideration to changes in interest rates.

Unlike traditional life insurance policies that offer fixed premiums and a guaranteed death benefit, interest sensitive life insurance may allow additional flexibility in premium and death benefit options. Policyholders of interest sensitive insurance can also withdraw from or borrow against the cash value account while they're alive, unlike term life insurance, which does not accrue any type of cash value.

How interest sensitive life insurance differs from traditional policies

Life insurance policies that are interest sensitive are typically more flexible than other policies that offer fixed rates. Here are a few examples of how they differ:

  • Flexibility: Policyholders can often make adjustments to the death benefit and premium — within certain limits set by the insurance company — which allow individuals to tailor coverage to their needs and budget as they see fit.
  • Cash value accumulation: For interest sensitive life insurance, cash values will grow at a minimum guaranteed rate of interest. However, these policies will also respond more quickly to a changing interest rate environment. When interest rates are high, the policy's cash value may grow beyond the guaranteed minimum interest. On the other hand, if interest rates are low, the policy may not earn cash value in excess of the guaranteed minimum, however, it is still covered by the minimum guarantee. This is different from traditional policies, which usually do not respond to a changing interest rate environment.

Types of interest sensitive life insurance

Interest sensitivity applies to a range of life insurance options. All universal life insurance policies are interest sensitive, while only some whole life policies offer interest sensitive features.

Whole life

Whole life insurance is a type of permanent life insurance. That is, it's guaranteed to provide coverage for the policyholder's entire life so long as the premiums are paid. Within this category, there are a couple popular policies:

  • Current assumption whole life: Current assumption whole life insurance is a type of policy wherein the insurance company makes assumptions about certain factors, such as interest rates and mortality costs, to determine the premiums and cash value growth of the policy. These are typically periodically reviewed and adjusted based on current experience.
  • Single premium whole life: This type of permanent life insurance policy is paid for with a lump sum premium payment upfront, as opposed to payments over time. With a single premium whole life policy, the policyholder makes a one-time payment to the insurance company and is insured for their lifetime.

Universal life

By nature, all universal life policies are interest sensitive. However, it's important to note that the cash value growth of universal life insurance policies is not directly tied to market indexes or investment options, unlike indexed universal life insurance. Instead, interest crediting is typically based on general interest rate movements and the performance of the insurance company's investment portfolio.

Key benefits and features of interest sensitive life insurance

Interest sensitive insurance policies offer some unique benefits compared to other types of coverage. From faster cash value growth to payment flexibility, these kinds of policies are valuable in more ways than one.

Here are a few reasons why someone may choose a policy with interest sensitive features:

Faster cash value growth

The cash value component of interest sensitive policies essentially acts as a tax-deferred savings account and grows over time. That means, since the policy won't be taxed until later, the account can grow much faster. Still, when a policyholder decides to withdraw or borrow against their cash value, they'll only owe tax if they withdraw an amount more than what has been put in up until that point.

Tax-free death benefit

Death benefits included in interest sensitive whole life insurance policies benefit from being 100% tax-free. So, when a policyholder passes away and a claim is filed with the insurer, beneficiaries won't owe any money to the IRS, no matter the value of the policy.

Flexibility in premium payments and death benefits

Having the flexibility to adjust premium payments and death benefits with an interest sensitive policy allows policyholders to choose a payment option that is affordable and aligns with their budget. Additionally, having the option to tailor death benefits can help policyholders customize the payout amount to meet their needs and the needs of their beneficiaries in the future.

Realizing the potential of interest sensitive life insurance policies

Interest sensitive whole life insurance policies are a great long-term strategy for permanent life insurance. To realize their full potential, here are a couple more good-to-knows about the nature of this kind of insurance:

Minimum guaranteed interest rates

Every interest sensitive policy has a minimum guaranteed interest rate. That means that, when interest rates are particularly low, policyholders are still covered and their cash value will never earn less than that guaranteed amount.

Conversely, interest sensitive policies earn more cash value in a higher interest rate environment.

Surrender and cancellation

When surrendering an interest sensitive policy, like universal life insurance, the policyholder will receive what's called the surrender value. This amount is determined based on the current cash value of the account minus any surrender fees.

It's important to remember, though, that surrendering a policy effectively ends coverage and beneficiaries will not receive a death benefit upon the policyholder's passing. Further, if the amount received from a surrender is above the base cost, that counts as taxable income.

To learn more about interest sensitive life insurance, contact Lewis & Ellis today.



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