Types

• There are various types of life insurance on the market that offer interest crediting. These are all permanent life insurance policies. Whole life insurance, universal life insurance and variable life insurance are the primary cash value products available. Each one credits interest in a different way, though only two of these products--whole life and universal life--typically offer guaranteed interest crediting.
  
  

Significance

• High interest crediting builds cash value into the policy at a rate that is known in advance. This is significant because the insurance company must choose investments that are able to sustain high crediting potential over the long-term. These high interest crediting investments also need to be liquid enough to support the significant buying and selling done by insurance companies.
  
  

Benefits

• High interest crediting attracts potential clients, who see the value of a better guarantee in the form of high cash values. The higher the guarantee, the less the client needs to worry about variables in the policy affecting its cash value.
  
  

Drawbacks

• A downside to high interest crediting is that other variable aspects of a policy that can enhance its cash value may need to be adjusted downwards or limited. For example, a high guaranteed interest crediting rate on a dividend-paying whole life policy means that the company has less money to invest since it has to pay more of it back to policyholders. This, in turn, decreases dividend potential. The same can be said of universal life insurance. For example, when guaranteed rates on equity-indexed universal life are higher, cap rates on the product tend to be lower, which limits the enhanced interest crediting potential of the contract.
  
  

Considerations

• Before choosing a high interest crediting product, consider the tradeoff. A high guaranteed interest crediting rate means that there is likely less variability in the returns you will receive. But, you need to consider what you ultimately want from your cash value policy. If you are unconcerned with the uncertainty of future dividends, for example, a participating whole life policy with lower guaranteed rates may be right for you.