The three methods of cash-value crediting

You should first read the Universal Life article to get a general understanding of universal life insurance, and then come back to read this article.

There are three main cash-value crediting/growing methods used in universal life policies: Traditional, Variable and Indexed.

With the traditional interest crediting method, cash-value is credited either at the carrier’s current stated rate, or the minimum crediting rate as defined by that particular policy. It is useful to understand that universal life came about in the 1980s when bank interest rates were above 10%, and traditional whole life cash-value projections didn’t look attractive in comparison to a savings account or bank C.D.

While it was not uncommon to see universal life policies with cash-value crediting rates of 8% or higher, a typical provision in the policy allowed the crediting to be reduced, as the carrier saw fit, to a minimum “guaranteed” interest rate, typically 4%-5% in those days. Another component that is not generally fixed as it is in whole life insurance, is the cost of insurance, it too is changeable by the carrier up to a guaranteed maximum. So depending on the carrier, if you have an older UL where the crediting is now at the guaranteed minimum of 4% or 5%, your policy still may not perform well if the carrier has increased to cost of insurance of your policy, meaning more of your premium and possibly the already accumulated cash-value, will have to go toward servicing the increasing policy costs.

These are just a few things that make universal life a much more complicated product for the average person to own, without the perennial help from a knowledgeable agent. It should also be highly appreciated that many carriers have experienced cost of insurance increases over the years, and especially in those cases, it translated into results that did not resemble the “current” assumptions, costs, and crediting rate that was shown on the original illustrations, in many cases, forcing the policy holder to drop the policy as the costs became unaffordable.

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