When interest rates were stable and predictable, life insurance thrived
But when interest rates in the economy suddenly spiked to more than five times those 3-4 percent long-term rates on cash value policies, massive amounts of cash value were borrowed (or policies were surrendered) to chase the much higher returns available in money market accounts. This was in exchange for the stipulated premium, which was reserved with a guaranteed rate of 3 or 4 percent depending on when the policy was purchased. Whether "par" or "non-par," it was the insurance companies that assumed the investment and mortality risk inherent in the long-term promise to pay a death benefit. By contrast, privately owned and publicly traded insurers sold non-participating ("non-par") Whole Life policies with lower guaranteed premiums but without the dividends; excess profits went to the shareholders.Mutual life insurers sold participating Whole Life (often referred to as "par" Whole Life), charging slightly more than the guarantee would require, but in turn paying dividends (literally a return of excess premiums) to enhance a policy's long-term benefits. Whole Life policy premiums were guaranteed. While these late-twentieth-century economic fluctuations had huge financial implications and repercussions on America, they specifically precipitated a profound change in the life insurance industry. In spite of such efforts, inflation persisted and brought to the late 1970s and early 1980s some of the highest inflation and interest rates that had occurred in anyone's memory (the consumer price index CPI exceeded 14 percent in March 1980, and the prime lending rate peaked at 20.5 percent between July and September 1981). New sales plunged on this type of fixed "investment" life insurance, and the industry quickly introduced an entirely new form of life insurance: flexible premium Universal Life and Current Assumption Whole Life. As participating Whole Life began to suffer from the issue of such interest rate differentials, it was particularly hard on non-par Whole Life policies because there was no mechanism to pass through the insurer's higher earning potential on new fixed return investments.