What Are FL Life Policy Loan Rates Based On?

Life insurance policy loans offer a way for policyholders to access the accumulated cash value within their permanent life insurance policies. These loans are distinct from traditional bank loans because they borrow from the policy’s own value, rather than from an external lender. Some policy loans feature adjustable interest rates, meaning the rate charged on the borrowed amount can change over time.

Understanding Policy Loans and Adjustable Rates

A life insurance policy loan enables borrowing directly from the policy’s accumulated cash value. Unlike a typical bank loan, there is no credit check or rigid repayment schedule, as the policyholder borrows their own money, with the policy serving as collateral. The outstanding loan accrues interest, and if left unpaid, the loan balance and accrued interest will reduce the death benefit paid to beneficiaries.

An adjustable rate means the interest rate is not fixed for the entire loan duration. Instead, it fluctuates periodically based on criteria in the policy contract. This variability means the cost of borrowing can increase or decrease, impacting the policy’s financial dynamics. Policyholders can choose to make periodic payments of principal and interest, interest-only payments, or allow the interest to be deducted from the cash value.

Common Benchmarks for Adjustable Loan Rates

Insurance companies typically use external benchmarks and internal factors to determine or adjust life policy loan interest rates. A widely used external benchmark is the Moody’s Corporate Bond Yield Average (MCBYA). This index reflects the average yield on a composite of seasoned corporate bonds, and its fluctuations can directly influence the adjustable policy loan rate. Other publicly available interest rate indices, such as the Prime Rate or the 90-day Treasury bill rate, may also serve as benchmarks.

The mechanism for applying these benchmarks often involves adding a spread or margin to the benchmark rate. For instance, a policy might state that its adjustable loan rate is the MCBYA plus a certain percentage. Internal factors, such as the insurer’s general investment yield, dividend scale, or cost of funds, also play a role in setting these rates. Insurance companies aim to ensure that the loan interest rates align with their investment returns to maintain financial stability and profitability.

Florida’s Regulatory Framework for Policy Loan Rates

Florida law provides specific regulations governing life insurance policy loan interest rates, particularly for adjustable rate loans. Policies issued after October 1, 1981, must include a provision for policy loan interest rates that either do not exceed a maximum of 10 percent per year or allow for an adjustable maximum interest rate. For adjustable rates, the interest charged cannot exceed the higher of two metrics: the published monthly average for the calendar month ending two months before the rate determination date, or the rate used to compute cash surrender values plus one percent annually.

The maximum rate for adjustable loans must be determined at regular intervals, at least once every 12 months, but no more frequently than once every three months. The policy loan interest rate can be increased if the benchmark-derived rate would result in an increase of at least 0.50% per year. Conversely, the rate must be reduced if the calculated reduction is at least 0.50% per year. The Florida Office of Insurance Regulation oversees these provisions, ensuring that adjustable rates bear a reasonable relationship to other interest rates and that policyholders benefit through higher dividends or lower premiums.

Policy Specific Rate Application and Communication

The general benchmarks and state regulations translate into specific terms found within an individual life insurance policy. Policyholders can locate the adjustable rate provisions in their policy contract, typically within sections related to “policy loan” or “interest rate clauses.” These sections detail the specific benchmark used, the frequency of rate adjustments, and any caps or floors on the interest rate.

Insurers are required to communicate rate changes to policyholders. When a cash loan is initiated, the insurer must notify the policyholder of the initial interest rate. Insurers must also provide reasonable advance notice, typically at least 30 days, before implementing any increase in the policy loan interest rate. This communication ensures policyholders are aware of how their loan costs may change, allowing them to make informed decisions. Annual statements often include details on outstanding policy loans and the current interest rate.