Fixed loan

A fixed loan is one of the two types of policy loan on an indexed universal life (IUL) policy, alongside the participating loan. Its net cost is the spread between two rates set under the policy, so it does not depend on what the index does.

How it works

When the loan is taken, the insurer moves an amount equal to the loan into a loan account: on one contract first from the fixed account, then from index segments as they mature. Then:

1. the insurer charges interest on the loan balance at the loan rate in the policy;
2. it credits interest on the loan account at a lower rate, also set in the policy;
3. the net cost of borrowing is the difference between the two rates, often called the spread;
4. the rest of the cash value stays in the index accounts and is credited under the cap rate, participation rate and floor as before.

The loaned amount earns the loan account rate in place of index credits, so the net cost of a fixed loan is the same in a strong index year and a flat one. Interest can be paid each year or added to the loan, in which case the amount held in the loan account usually grows with it. The policy sets the loan rate and the credited rate, and some contracts cap the spread between them.

Worked example

Illustrative figures, not a forecast. A fixed loan of US$100,000, charged at 6% a year, with the loaned amount credited at 4.75% a year. The rest of the policy is on a 9% cap, 100% participation and a 0% floor.

• Interest charged: US$6,000 a year.
• Interest credited on the loan account: US$4,750 a year.
• Net cost: US$1,250 a year, or 1.25%.
• Index year of +11%: the rest of the cash value is credited 9% and the loaned amount 4.75%. The net cost of the loan stays US$1,250.
• Index year of −5%: the rest of the cash value is credited 0% and the loaned amount still earns 4.75%. The net cost stays US$1,250.

With the interest paid each year, ten years cost US$12,500 net. The trade-off shows in strong years: left in the index account, the US$100,000 could have been credited up to 9%.

In an international IUL

On the international contracts Capital for Life uses, the fixed loan rate is variable and reset each policy anniversary: one contract quoted 5.25% in 2026, with the net cost after the credit on the loaned amount capped at 1.25% a year. In the surrender charge period a fixed loan is usually a cheaper route to cash than a withdrawal, which in an early policy year can carry a one-time surrender charge of up to 9.5% of the amount taken. A net cost that does not move with the index suits retirement income drawn through loans over many years. The offshore trust or company that holds the policy takes the loan, and the loan and interest must stay within the cash surrender value, which annual reviews check.

Common questions

What is the net cost of a fixed IUL loan?

The loan rate less the rate credited on the loan account: with 6% charged and 4.75% credited, 1.25% a year. Each insurer sets its own rates, shown in the policy illustration.

Does a fixed loan earn index credits?

The loaned amount earns the loan account rate. The rest of the cash value stays in the index accounts and earns index credits as normal.

Fixed loan or participating loan: which costs less?

A fixed loan's net cost does not depend on the index. A participating loan leaves the loaned amount earning index credits, so it can beat the loan rate in a strong year and fall short in a flat one. With both loans charged at 6% and the fixed loan credited at 4.75%, the participating loan costs more in any year when the index credit is below 4.75%, and less when it is above.

Go deeper: model a fixed loan in the calculator and IUL policy loans.