Adjustable Rate

What Does Adjustable Rate Mean?

An adjustable rate is an interest rate that fluctuates over time, unlike a fixed interest rate, which remains constant. Adjustable rates are usually tied to a benchmark that dictates the rate changes, providing a more predictable structure for all parties involved.

Insuranceopedia Explains Adjustable Rate

For example, many lenders use the London Interbank Offered Rate (LIBOR), the interest rate large banks charge when lending to one another, as a benchmark for setting adjustable rates. When the LIBOR increases, adjustable rates rise; when it decreases, adjustable rates fall.

In the context of insurance, variable life insurance policies may also feature an adjustable rate for their cash value. Policyholders can choose to invest the cash value in interest-earning assets like bonds. For people who want some growth potential without going fully into market-based investments, an indexed universal life insurance policy is another option that uses an adjustable crediting rate tied to a market index. This differs from whole life insurance, which guarantees a fixed interest return each year. Anyone weighing variable products against whole life insurance rates should pay close attention to whether the cash value’s interest is tied to a benchmark or locked in for the life of the policy.