There are so many factors that can affect your financial decision-making — from where you are in your military career to the number of dependents you have, to what your short- and long-term goals look like. You also need to consider how your finances are affected by inflation, interest rates, and what is happening in the financial markets.   

For instance, the Fed lowered the interest rate three times in 2024. Although the bank savings rate went down from a high in early 2024, mortgage rates went up. If you’re wondering how you can best allocate your money to strengthen your financial outlook in this environment, consider if it would be best to put off refinancing your home and instead put money in a high-yield CD or perhaps buy a whole life insurance policy.  

The best answer for you depends on your unique financial circumstances. But to help you make sense of it all, let’s consider the pros and cons of these options.

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 sample based on the earlier question of whether you’d be better off using your money to buy a whole life insurance policy offering a 5% credit rate or putting it in a CD 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	$500.00	$500.00
Taxes (25% Bracket)		$125
Admin Fee at 3/4%	$75
Net Growth	$425	$375
End-of-Year Value	$10,425	$10,375
Yield	4.25%	3.75%

 

 Keep in mind that life insurance yields 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 tax advisor or financial professional.

If you are looking for a long-term way to add to your wealth and legacy this year, look at AAFMAA’s Wealth Builder Life Insurance policy, which currently offers a 5.1% crediting rate, plus all the benefits of AAFMAA Membership, including our hallmark Survivor Assistance Services. If you’d like to learn more about how AAFMAA can help you achieve your financial goals, contact an AAFMAA Member Benefits Representative today at 877-398-2263 or get a free quote online right now.  

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This article was originally published January 17, 2024.