Rhode Island Life Insurance Practice Exam

When taking a policy loan against the cash value of a Whole Life policy, which type of interest rate applies?

1. Fixed rate loan

2. Variable rate loan

3. Simple interest loan

4. Compound interest loan

The correct answer is: Variable rate loan

When taking a policy loan against the cash value of a Whole Life policy, the interest rate that applies is typically a fixed rate loan. Whole Life insurance policies allow the policyholder to borrow against the accumulated cash value, and the interest on these loans is generally predetermined and remains constant for the duration of the policy. A fixed rate loan provides stability and predictability for the policyholder, as they know exactly how much interest they will owe over the duration of the loan. This contrasts with a variable rate loan, which fluctuates based on market conditions and may not provide the same level of certainty for financial planning. By choosing a fixed interest rate, the policyholder can manage their finances more effectively without the risk of increasing costs associated with a variable rate loan. Additionally, the interest charged on policy loans is often not compounded; instead, it may be assessed as simple interest, which is calculated only on the principal amount borrowed.