Comparative Interest Rate Method
What Does Comparative Interest Rate Method Mean?
The comparative interest rate method is a technique for calculating the cost differences between two insurance policies. This method is interest-adjusted, meaning it takes interest costs into account. Typically, it compares the cost differences between a decreasing term policy with a side fund and a whole life policy. The calculation comes up most often when buyers are deciding between term and permanent life insurance, since the two policy types behave very differently once interest on accumulated cash is factored in.
Insuranceopedia Explains Comparative Interest Rate Method
The comparative interest rate method is frequently used in the insurance industry because it helps prospective life insurance buyers determine which policy may be best suited for their needs. Interest is a crucial variable in life insurance, as it can significantly impact the policy’s value. This matters because whole life insurance rates tend to run well above term premiums, and the method is one way to check whether the extra cost pays off over the life of the policy. If a particular policy is found to be more favorable after applying the comparative interest rate method, it can serve as a strong selling point for that policy.
