In the broad financial market the interest rate paid reflects the degree of risk associated with the future payment. The riskier the venture, the higher the interest rate paid. The more secure the principal, the lower the interest rate paid. Many of the illustrations in this chapter assume 5.5 percent interest. This rate is only representative of rates that could be used by companies in computing premiums and reserves on their various products.

The actuaries designing a permanent cash value life insurance product must select the interest rate carefully, as it will be guaranteed for the lifetime of the contract and subject to a statutory maximum. While companies tend to select a conservative rate, perhaps one percentage point less than they expect to earn on their investments over a long period, they also must offer rates that are competitive with other insurers and with other financial intermediaries. Permanent life insurance contracts in force today have been issued over a period of many years. Interest rate guarantees in those policies range from 3.5 percent to nearly 6 percent.

Flexible premium contracts like universal life also quote interest rate guarantees with this same range, but they derive most of their marketing appeal from the possibility that they will pay rates higher than those guaranteed. As demonstrated in chapter 16, reserves under such contracts are recalculated on a similar interest basis.