Life insurance companies generally adopt one of two general interest crediting methods that are in widespread use throughout the industry. These 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. 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, fielding 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.

Market Rate- the reader will recall that 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. Some insurers will allow policy owners to elect to use dividends to be applied directly against any interest and/or principal of a policy loan before being used in one or more other dividend options. It will be towards your own advantage to monitor interest rates before sticking to a policy.