#447 | 7702 Rate Update for 2025

We’ve spilled a fair amount of ink on 7702 rates since the rate regime changed in 2021, starting with #257 | The Section 7702 Christmas Miracle. Symetra was the first carrier to incorporate the new rates into illustrations, which we covered in #263. What seemed like a straight-line effect on product  – higher premium limits, better accumulation efficiency, lower Target premiums – got muddled with Allianz taking a different approach (covered in in #293). From there, we covered the spate of changes to Whole Life products in response to the new rate flexibility, including a few products that arguably couldn’t have even existed prior to the 7702 rate change, such as the MassMutual 8 Pay (#394).

But since then, things have settled down quite a bit. The current regime feels natural, almost as if things have always been this way. We’ve become accustomed to the idea that accumulation-oriented products have lower guaranteed rates (#279, #286, #297, #338) and protection-oriented products have higher guaranteed rates (#440). Product effectively now has a new dimension in the form of guaranteed rate, a concept we covered in #297 | Whole Life Goes Three Dimensional. The wider the gap between the minimum 7702 rate and the maximum non-forfeiture rate, the more dimensionality and differentiation in product design, particularly for Whole Life.

The irony is that Whole Life hasn’t been the primary beneficiary of the new 7702 regime, despite the fact that Whole Life carriers were the ones primarily pushing for the change. Participating Whole Life sales from the major players grew 33% in 2021 – before the new wave of Whole Life products fully hit the market. Since then, participating Whole Life sales have steadily declined, which undoubtedly has more to do with competition from other asset classes in a high-rate environment. It’s a tough time to sell Whole Life even if, as we argued in a previous article series (#378, #379, #380), it’s arguably one of the best times to buy it.

Variable UL, however, has continued to grow by leaps and bounds (#315 | The Rising Tide of Accumulation VUL). Some of that is due to traditional retail VUL sales, but a fair bit of it continues to be driven by Private Placement (#288). That market is extremely sensitive to fees. More than any other, it is driven by the core tradeoff between taxes and policy charges where every basis point matters. The current 2% minimum 7702 rate allows for maximum efficiency in accumulation designs. More traditional carriers are piling into PPLI, as we’ll cover in a future article.

All of this action is predicated, to some degree, on the stability of the minimum 7702 rate, which has remained steady at 2% since 2021. But it will not remain steady forever. At the heart of the new 7702 regime is a floating rate structure. We first called this out in #328 | Rising Rates and Section 7702, which is a primer on how changing interest rate environments could affect the minimum 7702 rate. Steve Cox went deeper into the mechanics in #357 | The Multi-Verse of 7702 Rates. But the short version of the story is pretty simple – persistently higher rates increase the probability of an increase to the minimum 7702 rate, but with quite a bit of nuance. It’s not just about higher rates, but also the particular path of how rates change over time.

Steve covered this storyline in great detail in #387 | Threading the Needle on 7702 – but that was published two years ago in December of 2023. It’s high-time for an update. Below, Steve Cox walks through the current state (and recent drama) of the 7702 rate. Enjoy! – Bobby Samuelson

A Quick Primer on 7702 Rate Determination

For those who haven’t committed the methodology for determining the 7702 rate to memory – and I wouldn’t blame you – here’s the quick version. The determination flows through several steps, each with its own set of biases designed to keep the rate low.

The first step is the valuation rate, which is used for life insurance reserves. This might seem like an odd place to start, but changes to valuation rates are what trigger reviews of 7702 rates. The formula for the valuation rate uses the lesser of the 36-month and 12-month Moody’s corporate bond yield ending in July of the current year, rounded to the nearest quarter point. The core concept is clearly to link the valuation rate to market interest rates, but with a slower reaction to rising rates than falling rates.

However, the relationship isn’t 1-to-1 with market rates. There’s a 35% dampening factor that anchors the rate around 3%. The formula broadly uses 35% of the difference between the Moody’s average and 3%. This means that even if corporate bond rates spike to 6%, the valuation rate only creeps up to around 4%. The formula is specifically designed to prevent huge swings in the valuation rate itself. It creates a buffer against extreme changes.

The valuation rate also has a buffer against frequent changes by only allowing a valuation rate change if the new calculated rate is more than 50bps different from the existing rate, with the changing taking effect in the following year. This keeps carriers from constantly having to modify their reserve calculations, but it also introduces an arbitrary trigger effect. Theoretically, valuation rates should change every year. But because of the 50bps buffer, valuation rates only change every so often. That distinction flows through to the determination of the 7702 rate, but with a couple of twists.

A change to the valuation rate triggers an Adjustment Year, which essentially opens a window to test for a potential change to the 7702 rate for the year after the new valuation rate takes effect. In the event of an Adjustment Year, the new the new 7702 rate is the lesser of the new valuation rate and the 60-month average Mid-Term AFR Rate as of the end of the prior year, rounded to the nearest percentage point. That 60-month lookback is a massive anchor on the 7702 rate. In a rising rate environment, the AFR average lags significantly behind the valuation rate because it looks back five years instead of three.

Add all of these factors together and the determination of the 7702 rate is a multivariate equation. A change to the valuation rate cascades down by creating an Adjustment Year, but the actual change to the 7702 rate will depend not just on the valuation rate but the 60-month average of the Mid-Term AFR and only then if the rate is enough to move the 7702 rate by a full percentage point after rounding.

Given all of these timing differences, it’s entirely possible – maybe even inevitable – that the 7702 rate will move out of step with the valuation rate, potentially standing still for years while the valuation rate increases, just because of the particular way that interest rates have moved. A change in the 7702 rate requires just the right rate level combined with just the right rate path over just the right amount of time. The stars have to align.

The Current Environment

And guess what we’ve had over the last couple of years? “Higher rate environment” is admittedly a subjective term – anyone who remembers the late 1980s or early 1990s might scoff at calling today’s rates “high.” But relative to 2021? Rates are certainly elevated. The Moody’s Seasoned Corporate Bonds – the index that drives valuation rate calculations – has been fairly steady between 5.00% and 6.00% since September of 2022, with a brief peak above 6.00%.

When we wrote #387, we laid out the scenarios for the 2025 long-life valuation rate and its sister rate, the maximum nonforfeiture rate. Our hope was that rates would rise enough in the first half of 2024 to push the 2025 valuation rate – based primarily on July 2021 through June 2024 Moody’s rates – up to 3.75% from the then-current 3.00%. We fell short. The rate moved, but only to 3.50%, which wasn’t quite enough to hold off another potential increase given the 50 basis point minimum change requirement.

That 2025 valuation rate change triggered a review of the 7702 rate for 2027, which is based on the 5-year AFR average ending in 2024. The problem? That 5-year window still includes the enormous trough of 2020 and 2021, keeping the 7702 rate pinned at 2%. The 2026 valuation rate ended up as “no change” from 2025, meaning no review of the 2027 7702 rate. We dodged a bullet.

Where We Stand Today

So where do we stand now? A month ago, we had just experienced the fifth straight decline in Moody’s rates. Economic signs were indicating no end to that trend. I was about to publish a prediction that the 2027 valuation rate would be another “no change.” Rates appeared to be falling quickly enough for the 12-month average to dip below the 36-month average, allowing the lower-rate bias in the methodology to achieve its intended purpose.

Then the November 2025 Moody’s rate was published at thirteen basis points higher than October. All of a sudden, the 2027 valuation rate is sitting squarely on the fence between a “no change” at 3.50% and a 50 basis point increase to 4.00%.

What Happens If the Rate Moves

If the scales tip toward a 4.00% valuation rate, it is an absolute certainty that the 7702 rate will increase in 2028. The halcyon days of 2% will be behind us. We’ll be moving into a 3% environment for 7702 rates, with a maximum nonforfeiture rate of 5.00% versus today’s 4.50%.

The implications will ripple across the market. We’ll see lower 7-pay premiums, reduced maximum funding capabilities, and higher guaranteed cash values. Long-pay premiums will come down thanks to the higher nonforfeiture maximum. Dividend capacity will shift, leading whole life carriers to reshape their dividend patterns. There would be a host of product changes in 2028 – and potentially something of a firesale in accumulation-oriented products in 2027 as producers and clients rush to lock in the old limits before they disappear.

We may very well look back on the products of 2021-2027 as the golden age of accumulation products for life insurance. To be sure, accumulation sales still work with higher 7702 rates, but there is decidedly less flexibility, particularly at younger ages. The effect will be felt most strongly at life insurers that rebuilt their portfolios with a focus on 2% products, such as Northwestern Mutual, but also for Universal Life writers that re-tooled their entire suites for the current regime. How much has higher funding capacity actually poured fuel on the IUL and VUL fires? Most carriers would prefer not to find out.

The Verdict Is Still Out

Fortunately, the jury is still deliberating. The final verdict comes with the June 2026 Moody’s rate. Between now and then, we’ll be watching the monthly publications closely. A few more upticks and we’re looking at a rate change. A few declines and we’re back in the safe zone. It’s that close.

Counter-intuitively, higher rates in the first half of 2024 would have been better for the industry because they could have pushed the 2025 valuation rate all the way to 3.75%, making it harder for a subsequent move to trip the 50 basis point threshold. Instead, we landed at exactly the wrong spot – high enough to trigger a review, but not high enough to insulate us from another change. We’re threading the needle yet again. Everything hinges on what happens in June. -Steve Cox