A Universal life (UL) insurance policy frequently uses what is referred to as a portfolio rate when paying interest to a policyholder. (Most common form of return) This is when the company does the investing (their portfolio) and pays a rate based on their return. You will recall I mentioned that a company might be earning 7.5% and will keep 1.5% and pay out the 6% as a portfolio rate. I also mentioned that today many companies are paying 3.5% to 4.5% and yet banks are only paying about 1%. The interest rate market has been dropping or remained a steady low for the last 11 years.

When companies pay based on a portfolio rate, what would cause the portfolio interest rate on a UL to perform better than the market in an extended declining interest rate market, and yet would perform worse than the market in an extended increasing interest rate environment?