Fixed Policy Loan Interest Rate Pitfalls and GPRS System Overview
Fixed Policy Loan Interest Rate Pitfalls
The fixed policy loan interest rate remains unchanged once set, preventing any adjustments over time. If the market-driven loan interest rate significantly surpasses the fixed policy loan interest rate, policyholders may take advantage by borrowing against the policy and reinvesting the funds, thus earning a profit margin from the interest rate difference.
In a high-interest environment, this approach can severely impact an insurance company’s cash flow. For instance, the U.S. life insurance industry faced cash flow difficulties during the high-interest rates of the 1980s. Consequently, many policy loan rates are now floating to stay slightly below the prevailing market rates, effectively removing the incentive for policyholder arbitrage.
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