Every whole life policy has a guaranteed interest rate built into its cash value. It's the minimum growth the contract promises, no matter what happens to the company's dividends. For decades, a lot of whole life policies carried a 4% guarantee. Policies issued in the last few years usually guarantee less. The reason is a change to the tax code that took effect in 2021, which I covered the year it passed in a video on the 7702 changes.
Section 7702 is the part of the tax code that defines life insurance. It sets tests for how much money a policy can hold compared with its death benefit. Until 2021, those tests used interest rates written right into the law, and for most of them the rate was 4%. A whole life policy that guaranteed much less than 4% would have built guaranteed cash values too big to pass. So in practice, most whole life guarantees sat at about 4%.
Then rates stayed low for years. Carriers had a hard time promising 4% on new policies when their own investments earned less. The industry pushed for a fix, and a spending bill Congress passed at the end of 2020 swapped the fixed rates for rates that follow the market. For policies issued in 2021, the main rate dropped to 2%. Now it can move with interest rates instead of sitting at 4%.
That change did two things. First, it let carriers design new whole life with lower guarantees. When the change passed, I expected new products to land somewhere between 2% and 3.75%. Second, it raised the MEC limit. A MEC, or modified endowment contract, is a policy that took in too much money for its death benefit, which means loans and withdrawals lose their tax-free treatment. With a higher limit, a policy issued today can usually hold more money for the same death benefit than one issued in 2019.
If you own a policy issued before the change with a 4% guarantee, nothing about it changed. The guarantee is part of your contract for as long as you own the policy. The carrier can't lower it, and it can't raise it either. That locked-in 4% is one reason I tell people to slow down before replacing an older policy, even through a 1035 exchange, which moves cash value into a new policy without a tax bill but leaves the old guarantee behind.
A lower guarantee isn't actually worse in every case. It usually means more of your growth comes from dividends, which aren't guaranteed, and it can mean lower costs and more cash value in the early years. Stronger guarantees usually cost more and leave less room to grow. The carriers I work with were paying dividends well above 4% before the change, so for a high cash value design, the dividend history and the design matter more than the guaranteed rate. The guarantee sets the floor for the worst case, and you should know the worst case before you buy.
Pull the first pages of your policy contract and find two things: the guaranteed interest rate and the issue date. If the rate is 4% and the policy is otherwise healthy, get an in-force illustration from the carrier, which is an updated projection built from your policy's real values, before anyone talks you into replacing it.