Money held today is worth more than money promised in the future. The premiums, products, and financial operations of life insurance companies not only reflect life contingencies but also depend heavily on this time value of money�particularly when a company collects level premiums over the life of a policy, accumulating sums of money that it manages for many years before that money is disbursed. Companies invest these funds in income-producing assets with the earnings credited on a compound interest basis to benefit policyowners. Three different examples of interest rate crediting are as follows:

Each of these may differ from the other and all will fluctuate with economic conditions. To illustrate the concept, this chapter deals only with level interest assumptions, but insurance companies must accommodate nonlevel interest patterns. Premiums, surrender values, reserves, and dividends all reflect the differing value of money over extended periods.

Because interest earnings play such a vital role in the pricing practices and operations of a life insurance company, it is essential to consider the concept further. In order to explain their products to customers and assure that policy illustrations are appropriate, agents need a clear understanding of the relationship between interest rates and the financial features of life insurance. Today�s financial calculators and computer spreadsheets make these computations readily accessible to everyone in the financial community.