What is Interest Adjustment?
An interest adjustment refers to the adjustment of interest due when a financial or insurance contract is terminated or modified before the scheduled end date. In the context of life insurance policies, particularly indexed universal life insurance or whole life insurance, this adjustment is often applied when a policyholder decides to withdraw funds or make changes that affect the contract balance. The interest adjustment calculation accounts for the difference between the anticipated interest, based on the original timeline, and the actual interest accrued up to the point of change.
For example, if a policyholder withdraws cash from an indexed universal life insurance policy, an interest adjustment might be applied based on the time left until the next interest crediting date. This ensures that the insurer maintains the expected yield on their investment portfolios, as early withdrawals can disrupt anticipated earnings.
Interest adjustments also play a role in senior life insurance policies, where certain features like loans against policy cash value may incur these adjustments. Policyholders benefit by understanding how these adjustments work, as they can influence the ultimate cash values or withdrawal amounts available.
This adjustment is crucial in maintaining the integrity of insurance contracts and allows insurers to manage their investment returns more effectively, while also offering policyholders transparency in cash value fluctuations.
