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Interest Rates Are Up. What Should You Do?


Almost every decision you make about your personal finances depends on your circumstances — where you are in your military career, the number of dependents in your life and, of course, your short- and long-term goals. On top of that you must layer in external factors such as interest rates and what is happening in the financial markets.  

Given the resurgence of inflation following the pandemic that spurred the rebound of long-dormant interest rates, you are probably seeing ads for various savings and investment vehicles offering much more favorable rates of return than they have in a long time. So, you may be wondering, what’s the best way to strengthen your financial outlook in this environment? Would you, for example, be better off putting your nest egg in a savings account or a CD paying a 5% interest rate or buying a whole life insurance policy offering a 5% crediting rate?  

As with many decisions in life, the answer is: It depends.  

Let’s consider the pros and cons of these options so you can see which best fits your unique situation. 

What Do Interest Rates and Crediting Rates Have In Common? 

The first commonality between interest rates and crediting rates is yield — both create incremental gains in the value of assets, such as bank deposits and whole life insurance policies.  

Additionally, the assets associated with both rate types are considered low risk, as their fidelity primarily depends on the financial institutions that issue them. Bank deposits are insured by the federal government up to certain limits, and insurance companies have guaranteed minimum crediting rates for their whole life policies.  

Where Do Interest Rates and Crediting Rates Differ? 

One major area of difference between interest rates and crediting rates is in their tax treatment. Interest is taxed in the year it’s earned, while cash value crediting accumulates in a permanent life insurance policy tax-free.  

Another way these rates differ is in their realization. Bank product interest rates are realized in the shorter term, while whole life insurance products accumulate cash value crediting over the longer term.  

Which Kind of Asset Should You Choose?

When deciding between bank products and insurance policies, it’s important to consider whether you’re looking for a short-term cash flow or to accumulate wealth over the long term. 

Below is a chart based on the earlier question of whether you’d be better off using your nest egg to buy a whole life insurance policy offering a 5% credit rate or putting it in a bank certificate paying a 5% interest rate. (This example assumes you’re a single, 45-year-old non-smoking male.) 

Whole Life Insurance Policy Bank Certificate of Deposit
Cash Outlay $10,000 $10,000
Crediting Rate 5%
Interest Rate 5%
Benefit if you die $25,000 $10,000
First Year Accumulation $50.00 $50.00
Taxes (25% Bracket) $12.50
Admin Fee at 3/4% $7.50
Net Growth $42.50 $37.50
End of year Value $10,043 $10,038
Yield 4.25% 3.75%

When looking at this chart, remember that life insurance growth may be taxable if your policy is closed early. Bank certificates of deposit (CDs) have early withdrawal penalties, as well.  

For more details on the power of crediting or interest rates for your financial future, consult your trusted tax advisor or financial professional.  

Looking for a long-term way to add to your wealth and legacy in 2024? Don’t miss AAFMAA’s 5.1% crediting rates, offered through the Wealth Builder Life Insurance policy.  

One other important point: Not all crediting rates are created the same! An AAFMAA policy crediting at 5.1% has greater value than most other insurance companies’ offers because AAFMAA policies include exclusive Member benefits, including our hallmark Survivor Assistance Services, and have no surrender charges. If you’d like to learn more about how AAFMAA Membership can help you achieve your goals, or if you have other questions, contact AAFMAA today at 866-533-0521 or get a free quote online right now.