How Universal Life Policy Performance is Affected by Low Interest Rates
Traditional Universal Life (UL) policies credit interest to the cash value based on the insurer’s general portfolio earnings, which are highly sensitive to market interest rates. When interest rates are low, the performance of a UL policy can be significantly challenged.
The Impact on Policy Solvency
Low interest rates create two main problems for UL policies:
- **Slower Cash Value Growth:** The interest credited is low, meaning the cash value accumulates slowly, sometimes only slightly above the guaranteed minimum rate (if one exists).
- **Insufficient Funding:** If the credited interest rate is not high enough to cover the monthly Cost of Insurance (COI) and administrative fees, the cash value will decline.
This dynamic forces policyholders to either increase their premium payments or risk the policy lapsing in later years, highlighting the need for active management in a low-interest environment.
Disclaimer: This content is for informational purposes only and is not financial or legal advice. If current interest rates are low, review your UL policy projection with a focus on the guaranteed column to assess lapse risk.