The Risk of Variable Loan Interest Rates on Whole Life Policy Loans

While taking a policy loan against Whole Life cash value is a major benefit, choosing a **variable loan interest rate** carries specific financial risks that policyholders must understand, especially in a rising interest rate environment.

Understanding Variable Interest Risk

A variable rate policy loan means the interest charged on the loan will fluctuate over time, tied to an index like the Moody’s Corporate Bond Yield Average. If the external index rises significantly, the interest rate on your loan rises as well.

• Increased Cost: A high variable rate increases the overall cost of the loan, potentially eroding the policy’s net cash value growth.
• Negative Arbitrage Risk: If the loan interest rate rises higher than the guaranteed return rate of the cash value collateralizing the loan, it creates a negative interest spread, making the loan increasingly expensive to maintain.

This risk is particularly relevant if the policyholder chooses not to pay the loan interest out-of-pocket and allows it to compound against the death benefit.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. If you anticipate high or volatile interest rates, a fixed-rate policy loan might be a safer choice for financial predictability.