All About The Fixed Loan Rate

Fixed loan interest rates are common among many insurance companies.

Fixed loan rates are much easier to understand as the term “fixed” means just that – the rate is fixed and will not adjust.  With that said, it is beneficial to be aware of what features exist with policies that carry a fixed loan rate.

Most companies/policies that have a fixed loan rate usually have a rate of 6%.  Some insurance companies still carry an 8% loan rate, but this is diminishing as a result of the economy’s prolonged low-interest-rate environment. Here are some common questions and features to be aware of that exist with fixed loan interest rate policies:

  • Question: How often does the fixed loan rate change?
  • Answer: It does not. If the rate is fixed, the company will not raise the rate. With that said, some companies offer an option to opt-out of the fixed loan rate provision.

An example of this is Guardian Life Insurance Company:

  • Guardian offers a 6% fixed loan rate with Direct Recognition.
  • At policy year 10, a policyholder has the option to switch from a fixed loan rate to a variable loan rate. The variable loan rate has a floor of 4.5%, and the policy will function as a Non-Direct Recognition contract if elected.
  • If a policyholder elects to keep the 6% fixed loan rate, the rate will drop to a fixed rate of 4% at whichever comes last: 20 years or age 65. The policy will remain direct recognition if we carry a fixed rate of 4%.
  • Question: Are policies with a fixed loan rate Direct or Non-Direct Recognition?
  • Answer: Most policies with a fixed loan rate are Direct Recognition. However, it is important to understand the features of the company/product we are using.
  • Question: How does the company determine the fixed loan rate?
  • Answer: This is determined by the company and reviewed periodically.

Most companies that use a fixed loan rate on their policies have a 6% interest rate.  Several years ago (prior to 2016) it was common to see a fixed rate of 8%.  If a fixed loan rate adjustment occurs, they will assess the rate of all policies issued from that point forward. A policyholder that has a fixed rate in place from an established policy cannot experience a rate increase. However, the company will offer the option to existing policyholders to make the change, if they elect to do so.

For example:

  • We establish a policy today with a fixed loan rate of 6%. Fifteen years from now the company updates their fixed loan rate to 8%. Our policy will continue to carry a 6% fixed loan rate unless we elect to opt in to the new fixed loan rate.

Just like the article: “All About The Variable Loan Rate”, this has a lot of detail. It is always important to look at the specific insurance contract and company we are considering.  This allows us to review the actual terms of our policy. This article is meant to provide more information and education.

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