Understanding the “Spread” in Universal Life Insurance Crediting Rates

In traditional Universal Life (UL) policies, the **Spread** (or margin) is a key concept that impacts the actual interest rate credited to the policyholder’s cash value. Understanding the spread reveals how the insurance company profits from the policy’s investment component.

The Mechanics of the Spread

The insurance company invests the cash value in its general investment account and earns a gross rate of return. The spread is the difference retained by the insurer before crediting the remaining net interest rate to the policyholder.

$$ \text{Net Credited Rate} = \text{Gross Investment Yield} – \text{Spread/Margin} $$

Impact on Policyholders

In addition to the explicit deduction of the Cost of Insurance (COI) and administrative fees, the spread is an implicit cost. When market interest rates are low, the spread can significantly reduce the net interest credited to the cash value, potentially leading to slow growth and increasing the risk of policy lapse later in life.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. Policy illustrations should show the assumed gross rate and the spread, but this information may be complex to interpret.