A life insurance policy that is subject to a contract interest rate is referred to as

• A. Universal Life
• B. Indexed Life
• C. Variable Life
• D. Whole Life

Answer: (A)

The key idea is how the cash value earns interest. In universal life, the cash value is credited with interest at a rate defined in the policy—the contract interest rate. This rate is specified by the insurer and can be adjusted, usually with a guaranteed minimum, but it isn’t tied to market performance. That contract-based crediting sets universal life apart from other types.

Whole life generally uses a guaranteed fixed rate, but it isn’t described in terms of a contract-rate credit in the same way universal life is. Variable life ties cash value to the performance of separate investment accounts, and indexed life ties credited interest to a market index with caps and participation rates. So the policy described as subject to a contract interest rate is universal life.