Crediting rate

A crediting rate is the interest rate an insurance company adds to a policy's or contract's accumulated value. In current-assumption universal life and fixed annuities, the insurer declares the rate, usually for a year or longer, based largely on what its general account investments earn. In indexed products, the credited amount comes instead from an index formula with caps, participation rates and floors.

Every declared rate sits at or above a guaranteed interest rate the contract promises regardless of conditions. Hypothetical example: a universal life policy with a 2% guaranteed minimum declares 4.25% this year. With $50,000 in the account, that adds about $2,125 over the year before charges. If the insurer lowers the rate to 3.5% next year, the policy earns less, and an illustration that assumed 4.25% will overstate future values.

Declared rates are non-guaranteed elements that the insurer can change, typically each year. They follow broader interest rates with a lag, which is why many universal life policies sold when rates were high in the 1980s later underperformed their illustrations. Multi-year guaranteed annuities lock the rate for the full term. Compare an insurer's current rate with its history and its guarantee, not just today's number. See current-assumption universal life and crediting rates and how annuity rates are set and why they move.