What Is Interest-Sensitive Whole Life Insurance?

An interest-sensitive whole life insurance policy is like traditional whole life insurance in that it’s permanent life insurance with a death benefit that can last your entire life and a cash value component. But unlike a traditional whole life policy, it responds to market interest rate fluctuations. An interest-sensitive whole life policy carries extra risks and takes more work to manage, but it can achieve faster cash value growth than a traditional whole life policy. 

Understanding Interest-Sensitive Whole Life Insurance

Interest-sensitive whole life insurance encompasses many of the features of a traditional whole life policy, including lifelong coverage and a cash value component. Some interest-sensitive whole life policies are participating policies, which means the policyholders get a share in the insurance company’s profits in the form of an annual dividend.

In a regular whole life insurance policy, insurers keep the premiums and the death benefit the same. This applies even if prevailing interest rates change and impact the costs and cash value growth rate of the policy for the insurer. 

With interest-sensitive whole life insurance, changes to market interest rates have an impact on your policy performance. Higher rates earn you more money. You get more cash value and could potentially owe less for premiums. Conversely, when rates fall, your policy cash value grows less quickly.

You take on more risk with interest-sensitive whole life insurance, but also have more upside potential should market conditions be favorable for your policy. 

Interest-Sensitive Whole Life Insurance vs. Traditional Whole Life Insurance

As the table below shows, interest-sensitive whole life policies share many of the same features and benefits as traditional whole life policies. But there are some important differences, too.

With interest-sensitive and traditional whole life policies, you must continue making premium payments throughout the life of the policy to keep it active.

Benefits and Drawbacks of Interest-Sensitive Whole Life Insurance

Benefits of Interest-Sensitive Whole Life Insurance, Explained

• Responds quickly to market fluctuations: Insurance companies invest the cash value funds differently than they would with a traditional whole life policy, so earnings better reflect current fluctuations in interest rates. 
• Higher returns in a high-interest rate environment: When interest rates are high, an interest-sensitive policy will have more cash value growth than a traditional whole life insurance policy.
• No risk of losses: Interest-sensitive whole life insurance policies cannot lose money. These policies still earn a minimum guaranteed return even when market interest rates are low. 

Drawbacks of Interest-Sensitive Whole Life Insurance, Explained

• Grows more slowly in a low-interest rate environment: When interest rates are low, your policy may not earn more than the guaranteed minimum interest rate. 
• Risks of the policy lapsing: The policy can lapse if you don’t make premium payments or there is not enough cash value to make the payments. 
• No investment flexibility: With interest-sensitive whole life insurance, as with traditional whole life insurance, you still don’t have investment flexibility. You simply receive the market interest rates from the insurer. If you want more choices, you may want a different type of policy like variable universal.

Similar Types of Life Insurance

You may see other names used for interest-sensitive whole life insurance. Some of these names refer to the same type of policy while others have differences to be aware of.

Excess Interest Whole Life

Excess interest whole life insurance works the same way as interest-sensitive whole life insurance. An excess interest whole life policy is an interest-sensitive whole life policy with a fixed premium. You cannot change the premium yourself. If interest rates go up, the insurance company credits any excess interest earnings to the cash value account. You can apply this extra cash value to cover future premium payments if you wish. 

Current Assumption Whole Life

With a current assumption whole life policy, the insurance company periodically re-evaluates factors like interest rates and mortality costs (how many policyholders pass away each year) to determine premiums and cash value growth. Your premiums could go up or down depending on the results. This could happen every year or every few years. Should costs go up, you have the option to decrease your death benefit. That way, you could continue paying the same premium in exchange for having less coverage.

Single Premium Whole Life

With a single premium whole life policy, you pay the entire premium in a lump sum instead of making regular payments. In exchange, you get guaranteed coverage for a lifetime along with the growth in the cash value. If interest rates fall after you sign up, you could be asked to deposit additional premiums to make up for the lower cash value growth. The majority of single premium whole life policies are not interest-sensitive and will not ask you to make additional premium payments, though. 

Fixed Premium Universal Life Insurance 

Universal life insurance policies also base their cash value growth on market interest rates. A traditional universal life insurance policy allows you to adjust the premiums each year. However, a fixed premium universal life insurance policy charges the same amount each year—you can’t change that, making it operate much more like an interest-sensitive whole life insurance policy. The difference is that a fixed premium universal life insurance policy allows you to change the death benefit, whereas interest-sensitive whole life insurance keeps the same death benefit. 

Surrendering Interest-Sensitive Whole Life Insurance

To surrender a life insurance policy means to cancel it. As with many other kinds of life insurance, you can cancel your interest-sensitive whole life policy at any time. The insurance company can also cancel your policy if you do not pay your premiums or if it does not have enough cash value.

When you surrender an interest-sensitive insurance policy, you will receive the surrender value, which is the current cash value minus any applicable surrender fees. If the surrender amount is over what you paid in premiums, the government taxes your gains.

The Bottom Line 

While interest-sensitive life insurance policies carry greater risks than traditional whole life policies, they have the potential for more significant growth. To get the most out of interest-sensitive life insurance, you have to be willing to review your policy regularly and make adjustments to your financial plan when market conditions change. Discuss with an insurance agent or a financial advisor to determine whether this product makes sense or if you’d be better off with simpler, traditional whole life insurance.