How is the interest rate calculated?
The interest rate varies from one insurance company to another and is subject to change. For policy loans, simple interest accrues daily and does not compound until the anniversary date of the policy.
Example 1: If you have a policy loan of $20,000 with a simple interest rate of 6.2
To calculate the interest rate, multiply the loan amount by 6.2%:
$ 20,000 x 0.062 = $ 1,240
The interest for that year will be $1,240. To calculate the daily interest, divide the annual interest by 365 days:
$1,240/365 = $3.39
The interest per day would be $3.39.
The interest compounds on the anniversary date of the policy. Assuming that you have not made any repayments, the new principal amount after your policy anniversary date will be the sum of the amount borrowed plus the interest accrued:
$20,000 + $1,240 = $21,240
Example 2: Let’s assume that $20,000 was borrowed and repaid in 6 months
Multiply $3.39 by 180 days (assuming that there are only 30 days in a month to keep things simple).
$3.40 x 30 x 6 = $611.51
The interest owed is $611.51
Assuming you made a $10,000 loan repayment in the sixth month, the new balance will be $10,000 (principal) plus $611.51 (interest).
The wonderful thing about simple interest is that it’s calculated based on the remaining balance. Going forward, the interest accrued will be 6.2% of the $10,000 remaining.
If you have any other question with policy loan interest, do clarify it with your advisor.