Business and Financial News

Historically, bank interest rates have consistently outperformed the earnings from whole life insurance policies. Whole life insurance involves dedicating a portion of the premium cost to pure insurance coverage, with the remainder allocated to a savings or investment account.

Although not covered by FDIC or NCUA insurance, as are bank or credit union accounts, whole life protection typically generates positive annual earnings.

However, unlike bank savings accounts, which usually offer a stated (hopefully, guaranteed) interest rate, whole life insurance policies note a “projected” rate based on prior earnings. Unlike most bank accounts, when you compare insurance quotes you’ll typically learn of an “anticipated” rate.

Banks and credit unions invest depositors’ dollars and pay interest from their earnings. Life insurance companies essentially use the same procedure; however, life insurance quotes include their right to reserve the declaration of earnings, deduct administrative expenses, save some income for profit, and distribute the remainder to policyholders.

Throughout the 20th century, the unwritten “floor” for bank rates was five percent. The most basic savings account would typically carry a rate no lower than this. However, the late 1990s and early 2000s witnessed the elimination of this historic bottom rate as savings accounts paid as little as one percent or less on some accounts.

As the first decade of the new century closes, many basic bank and credit union savings accounts still offer interest rates of two percent or less, making life insurance rates more attractive. Home insurance quotes and auto insurance quotes also reflect a company’s earnings success to control premium costs.

Loan Rates and Claims Directly Affect Life Insurance Rates

In the banking industry, loan rates, not investment rates, most strongly influence savings rates. Since loan rates (even for home mortgages) are typically in the 6.5- to 10-percent range, banks can usually offer higher savings rates than other “safe” investments.

Other investments (stocks, bonds, mutual funds, and other equities) have certainly enjoyed much higher returns over time, but they’ve also endured significant losses.

Wise lending typically generates sufficient income to permit banks and credit unions to pay reasonable interest rates on savings. Life insurance companies, however, are at the mercy of claim volume.

Actuaries, trained to analyze, evaluate, and predict losses, can miss their targets more often than bank loans enter default. Excess losses, which are exceedingly costly, also typically lead to higher administration expenses. These factors can contribute to lower earnings and reduced interest rates.

The advantage life insurance companies enjoy from not posting a “guaranteed” interest rate, as banks must publish in advance, can be dramatically neutralized by excessive claims, ineffective management, and/or higher operating costs. Their interest rates sometimes suffer reductions because of these conditions.

Life insurance interest rates are a more competitive investment

Recent years have elevated the desirability of whole life insurance as an investment as compared to bank savings rates. Statistically, as bank savings interest rates have declined, life insurance interest rates have remained relatively stable.

Formerly considered low compared to bank rates, typical life insurance savings interest offerings are now more competitive. Much of the historic attraction of whole life insurance was the psychological effect of paying a monthly or quarterly premium (cost), which resulted in automatic savings deposits for the policyholder.

Even the most knowledgeable and disciplined people realized that paying their premium was an “artificial” necessity, since only a portion was allocated to life insurance coverage. However, it was convenient and repetitious and increased the policyholder’s savings account on a consistent basis.

The 21st century has evened the playing field for bank accounts and life insurance policies. The formerly lower interest rates offered by life insurance companies now equal or exceed those of many banks and credit unions.

As account balances increase, the always welcome compounding factor increases. Earning interest on interest accelerates the value of an account geometrically, not mathematically.

Understand that everyone must do their “homework” and compare life insurance rates. Life insurance accounts do not offer the guarantees of FDIC or NCUA insurance of account balances. Life insurance quotes should always be evaluated, even if one is only interested in term coverage, offering only insurance protection without savings account features.

Should one need their company to pay a claim, that company must exist. This requirement applies to all protection, including business insurance and other coverage.

Investigate the solidarity and stability of any insurance company under consideration. If whole life policies (with savings account features) are the target, examine recent prior period interest rates paid to estimate future earnings.

Learn of the size of their reserve accounts, those funds accumulated to pay claims and insulate the company from investment or catastrophic losses. Auto insurance rates are often quickly affected by recent losses.

Unless or until loan and market rates increase, life insurance accounts should remain competitive alternative investments to bank and credit union accounts. Down economies and recessions typically offer opportunities along with all the negative ramifications.

Small business insurance cost is particularly important during a recession as smaller companies are challenged to meet the dangers posed. The additional competitive option of life insurance interest rates offer additional savings opportunities – a light in the recessionary darkness.