The Policy Loan Interest Rate: Fixed vs. Variable Rates on Whole Life Loans

When taking a policy loan against the cash value of a Whole Life policy, the policyholder must understand the interest rate mechanism, which can be either fixed or variable. This choice impacts the long-term cost of accessing the cash value.

Fixed Loan Interest Rate

A **Fixed Rate** loan means the interest rate charged on the policy loan is set at the time of the loan and remains the same for the entire life of the loan. Benefits include budget predictability and simplicity, regardless of future economic shifts.

Variable Loan Interest Rate

A **Variable Rate** loan’s interest rate adjusts periodically (e.g., annually) based on an external index (like Moody’s Corporate Bond Yield Average). While the variable rate may start lower than the fixed rate, it carries the risk that the rate could increase significantly over time.

The Cost Comparison

The loan interest rate is crucial because the loan interest must be paid (or it accrues against the death benefit), while the cash value continues to earn its guaranteed rate (and non-guaranteed dividends). The lower the loan interest rate compared to the policy’s internal return, the more cost-effective the financing becomes.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. Always compare the fixed rate to the current variable rate and your risk tolerance before taking a policy loan.