Most people think life insurance is a check that gets paid after someone dies. That is only one piece. The same company is also holding money, growing it, and making promises that last for decades.
Interest rates drive how well it can do all of that.
Start here: what an interest rate really is
An interest rate is the price of using money. When you put money in a bank, the bank pays you a rate to use it. When you borrow, you pay the rate. Life insurance companies work the same way. They collect premiums, invest them, and use the earnings to keep their promises. When rates move, the promises a company can afford to make move too. Where rates are right now The Federal Reserve, or Fed, sets the short-term rate that banks build on. On September 16 it raised that rate by a quarter point, to 3.75% to 4.00%. That was its first hike since July 2023.
Why raise it?
Prices are climbing faster than the Fed wants. August inflation was 3.4% over the past year, the Fed’s goal is 2%, and officials don’t expect to get back to 2% until 2029. Longer-term rates matter even more to insurers, and the 10-year Treasury yield was near 4.8% in early September. Here is the part worth remembering. Nobody guessed this right. In January, Goldman Sachs expected the Fed to cut rates in June and September. By June, it dropped those cuts. After the September hike, it expected another one, then later pushed that call toward December.
If big bank economists keep changing their minds, we should not promise clients that any rate will last. We build plans that work if rates go up or down.
Annuities: a savings deal with a time limit
An annuity is a deal. The client hands an insurance company a chunk of money, and the company promises a steady rate or a steady income back. One popular type is the multi-year guaranteed annuity, or MYGA. It locks in one rate for a set number of years, a bit like a CD from an insurance company. People are buying. LIMRA reports $121.2 billion of annuity sales in the second quarter, the 11th quarter in a row above $100 billion. Its research head pointed to global tensions, record stock markets and rising rates. One annuity marketplace listed top MYGA rates of 5.00% to 5.75% earlier this year, so check today’s carrier sheets before quoting any number.
Now the deeper part.
Locking a rate is a bet on where rates go next. If the Fed keeps tightening and rates climb, the client who locked early looks early. If rates fall, the lock looks smart. The contract also has a surrender schedule, which means penalties for pulling money out early. So the client is choosing a rate and a time window for their money. Splitting funds across different terms, called laddering, helps with both.
One more trend: in the first quarter, buyers leaned toward products with stock market upside, like fixed indexed annuities and RILAs. As rates rose, fixed-rate products came back in the second quarter.
Cash value life insurance: the slow and steady kind
Some life insurance policies build cash value, a savings side that grows over time. Whole life is the best known. It is also the biggest product category in US individual life sales. Whole life from mutual companies pays dividends. Each company sets a dividend interest rate, and all the big mutuals tracked by Insurance Geek raised theirs for 2026, the second year in a row. MassMutual is at 6.60%, New York Life 6.40%, Guardian 6.25% and Northwestern Mutual 5.75%. That rate is one ingredient in the dividend formula. It is not what the client earns, and each company uses it differently.
Think of whole life as a big ship. It turns slowly. As old, low-paying bonds mature and get replaced, dividends drift up. When rates fall, they drift down just as slowly. A bank CD reacts much faster in both directions. For a client who wants steady, that slowness is a feature.
Indexed universal life, or IUL, works differently.
The cash value earns credits tied to a stock index, with a floor and a cap. Caps tend to rise when bond yields rise. Allianz showed a 12.25% cap on its September 1 rate sheet, but caps are not guaranteed and can be lowered later.
Policy loans cost more now too, since loan rates follow corporate bond yields and the NAIC benchmark average was 6.25% in September. Borrowing from a policy is a way to reach your money, not free money, and illustrations should say so.
The company behind the promise
Every guarantee is only as good as the company making it. This is where the story gets more detailed. Insurers need to earn enough on their investments to pay what they promised. To do that, many have put more money into private credit, which means loans made outside the regular banking system. The Financial Times has described insurance money as the lifeblood of private credit. A Forbes report, summarized by Insurance Business, says insurers supply roughly 23% of private credit capital. Moody’s counted $807 billion of private illiquid bonds on US life insurer books at the end of 2025, up $122 billion in one year. A private credit default index rose to 2.73% in the first quarter of 2026.
There is another side. The ACLI called the FT’s April article misleading. S&P says insurers are managing liquidity risk responsibly. An ICLE study found that larger private credit holdings were linked to lower estimated insolvency risk, and Morningstar DBRS called first-quarter private credit results benign.
Our read is not alarm. It is one more thing to check. When an annuity pays well above its peers, ask what is earning the extra yield, how much is invested with affiliated managers, and what the ratings and reinsurance look like. State guaranty associations offer a backstop, but the limits differ by state.
Five jobs a policy can do besides paying a death benefit
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A steady reserve. Cash value in a regular company account is not repriced every day. That can calm things down when rising rates are pushing bond prices lower.
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Tax-advantaged growth. Cash value grows tax deferred, and the death benefit generally comes income tax free. An actuary quoted by Advisor.ca says that edge grows when rates are higher.
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Retirement support. An annuity can cover the income floor while a permanent policy protects a spouse or heirs. The client does not have to pick one.
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Money for the family on a known event. The payout does not depend on a good market day. That helps when a family’s wealth is tied up in a business or property.
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Business and partner planning. Buy-sell funding and key person coverage are rate-aware talks. For CPA partners, they are also a way to build planning revenue after April 15.
How to say this to clients
Clients don’t need the Fed’s vocabulary. They need a simple picture and a question that helps them decide.
Match the message to the person
• Someone near retirement: lead with the income floor and the time window. “What do you need guaranteed, and what can stay flexible?”
• A business owner: lead with the family and the company. “If you weren’t here, what would need to be paid for, and by when?”
• A CPA’s client: lead with planning that continues after tax season. “Your accountant shows you last year. This is about the next twenty.”
What to avoid
• Promising that today’s rates, caps or dividends will last. • Showing an illustration as if it were a guarantee. • Praising a carrier for a high rate without knowing what supports it.