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Portfolio Rate

The portfolio average method credits policyholders with a composite of interest that reflects the company’s earnings on its entire portfolio of investments during the year in question. During periods of rising interest rates, the interest credited to the “new” contribution received during the year will be heavily influenced by the interest earned on investments attributable to “old” contributions those received and invested 5, 10, 15 or more years earlier. The interest credited will therefore be stabilized.

To illustrate this method under both a rising and declining interest trend, see Illustration 3.4 below. Under the steadily increasing trend, the contribution made in year 1 earns 3.0%, all funds in the account (new or old) in year 2 earn 4.0%, and all funds in the account during year 3 earn 5.0%.

Illustration 3.4

Illustrative Comparison of Increasing and Decreasing Portfolio Rates

Increasing Rates


Year 1

Year 2

Year 3

One 3% 4% 5%
Two   4% 5%
Three     5%
Decreasing Rates
One 5% 4% 3%
Two   4% 3%
Three     3%

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