Life insurance products vary significantly, with different terms, durations, premiums, and features. Compound interest may factor into your choice of product as it means that the interest you earn against your policy will be calculated against the full current account value–including interest you have already earned.

The opposite applies to life insurance products with ‘simple’ interest payments. In contrast, the financial interest earned is usually calculated against the net death benefit, excluding previously earned interest.


It is important to understand all the features and terms of any life insurance product and company you are considering. Varied interest calculation methods could impact the pace at which your account value grows and the costs of repaying an insurance loan or financial withdrawal. You can talk to an insurance agent to learn about compounding policies.

Compound interest is a feature in some life insurance policies, where the financial interest earned against the account value or death benefit increases faster over time because it is calculated to include previous interest earnings. Most financial savings accounts and loans use compound interest as a default, where you might, for instance, expect to pay monthly credit card or mortgage interest on the total outstanding balance–not on the principal amount borrowed.

These life insurance products work by reinvesting the interest earned into your personal policy, which compounds over time as the next interest calculation adds more financial value to the principal amount invested.

Standard Interest Calculation Methods in Life Insurance Plans

We’ve mentioned simple versus compound interest, and although the exact calculation method will depend on the insurance product, this is easiest to understand as follows:

1. Simple interest payments: The insurance company calculates the interest against the death benefit, often using a fixed interest rate agreed upon at the start of the insurance policy.
2. Compound interest payments: Each interest payment is added to your insurance policy value, and the subsequent interest calculation includes those values when determining the next interest payment due.

Insurance companies typically invest the premiums you pay, sometimes into stocks and bonds, and other times into financial investment markets like real estate or mutual funds. This also means that reinvested interest payments are potentially subject to risk, depending on the built-in policy protections offered.

Compound interest can be a compelling feature when comparing a life coverage product with a simple interest payment structure to one with a compound interest feature. As an example, we will assume that you have purchased a whole life insurance product with a value of $100,000 and that it offers an annual fixed interest rate of 5%, disregarding administration fees and other financial transactions.

If the insurance product were to pay the same interest rate against only the policy value and disregard previous interest earnings, your insurance policy would be worth $148,000 within thirty years.

The same product, with the 5% annual interest calculated as a compound interest payment, would mean your account value would climb to $263,846 over the next three decades, making a substantial difference to the insurance policy value without any further contributions on your part.

However, it remains essential to consider every factor when choosing a life insurance product because much depends on the death benefit you wish your family to receive and your intentions to draw on or access your insurance account value in the interim.

Is It Always Advisable to Purchase a Life Insurance Product with Compound Interest Payments?

Whenever you make a decision about a permanent or long-term financial product, you should weigh all the pros and cons and ensure you are confident that the insurance coverage and policy terms are right for you. Although compound interest can impact the account value attached to your life insurance product, this isn't the only basis on which to make an important decision.

For example, if you require insurance coverage for a fixed period to help ensure your children have a financial safety net until adulthood, you might opt for a term life insurance product rather than a whole life or universal life policy that includes a compound interest account value feature.

Which Life Insurance Plans Have Compound Interest?

Life insurance can be loosely grouped into product categories, but that doesn’t mean every product in the same category will have identical features, interest rates, or terms. It is more common to find compound interest offered on permanent life coverage products, such as universal life, whole life, and variable life insurance. 

Still, other conditions of insurance coverage may influence your choice, and you should verify the insurance calculation basis on an individual product level.

What Is the Difference Between Simple and Compound Interest in Life Insurance?

The basic concept is that an insurance product with simple interest earns interest based on the value of the death benefit. This value may not change or increase depending on your policy type and any contributions you make.

Compound interest payments involve reinvesting the interest previously paid into the policy, which means each subsequent interest payment is calculated against the entire account value, including financial interest already earned.

In the table, we can see a comparison between simple interest and compound interest for different compounding frequencies, using a principal amount of $1,000 at an annual interest rate of 5% over 1 and 5 years. Notice how the interest earned with simple interest remains the same regardless of the time period or compounding frequency, while the compound interest grows more significantly with more frequent compounding. For instance, after one year, monthly compounding yields slightly more interest than annual compounding, and over 5 years, the difference becomes even more pronounced. This demonstrates the powerful effect of compounding interest, showing how insurance investments can grow faster when interest is compounded more frequently.