Fidelity Life: How Do Rising Interest Rates Affect Life Insurance?

Interest rates are rising fast to combat inflation and normalize the economy. Many look at the monthly inflation figures and job numbers, but people with life insurance may also want to know how interest rates impact their policies.

It turns out that rising rates can significantly affect permanent life insurance with cash value. Many, but not all, of these effects can be positive. This article will explain how rising interest rates influence life insurance so policyholders know what types of life insurance quotes to consider.

How rising rates affect permanent life insurance policies

Here’s how rising interest rates can affect permanent life insurance policies for new and existing policyholders:

1. Existing policyholders    

When prevailing rates rise, a whole or universal life insurance policy’s dividend rate may also increases This means policyholders can receive more money back each year. They can then potentially use the funds to get cash, pay premiums, or reinvest the dividends into the policy to increase their death benefit and cash value.

Policyholders should keep in mind that it may take a few years before they receive the larger dividend rate, if any. This is because the life insurance company has to ensure they have sufficient returns from where they’re investing the premiums the policyholder pays.

2. New policyholders      

Rising interest rates can cause life insurance companies to increase competitiveness so they can boost profitability. To do this, some will offer permanent life policies with better features like accelerated cash value accumulation or lower premiums. This can make it a great time for new policyholders to get permanent life insurance.

How life insurance policyholders can take advantage of rising rates

Interest rate changes can also cause changes in life insurance policies. This allows savvy policyholders to maximize their cash value. Here are some ways they can do so:

1. Open a permanent life insurance policy

A permanent life insurance policy may be a good move for potentially building wealth when rates rise, thanks to the cash value growth component. With universal life insurance, for instance, the cash value grows based on current market rates , allowing policyholders to build more over time. And as mentioned before, some life insurance companies may offer more competitive options when interest rates are on the rise, making this a great time to get a policy.

2. Borrow against the cash value

Rising rates make traditional loans more expensive since lenders can charge higher rates. This is another area where the permanent life insurance cash value comes in handy.

When a policyholder builds enough cash value, they can borrow from it at low rates with no set repayment date. It acts similar to a tax-free income source — beneficial in an economic slowdown caused by rising rates.

That said, interest slowly accumulates on the outstanding balance. Therefore, as long as the policyholder keeps the loan balance smaller than the cash value, the policy will not lapse.

3. Withdraw from the cash value

Policyholders may also be able to withdraw from their cash value when it’s large enough. They can then use this to invest where they please to try and out-earn their cash value growth. However, policyholders must be aware of the risk involved in investing. Additionally, keep in mind that withdrawals beyond the policyholder’s basis may be taxable.

4. Surrender or sell the policy

Surrendering a policy gives the policyholder the cash value minus surrender charges. Selling it can earn them an amount higher than the cash value but less than the death benefit. The policyholder gets a large lump sum they could use to try and invest for higher potential returns if they pick the right assets. They should be aware of the risks involved in doing this, though. Policyholders must also keep in mind that they lose their life insurance coverage when they surrender or sell the policy.

Interest rates and life insurance policies

As rates rise, permanent life insurance can become more attractive to many. Existing policyholders can eventually benefit from rising dividend rates, and new policyholders can take advantage of more policy choices from competitive life insurance companies.

Regardless, policyholders should work with a licensed insurance agent to fully understand the potential effects of rising rates on their policies. This will help them formulate a plan to maximize the benefits of their policies and cash values.