Participating Loans / Variable Loans / Index Loans
Participating loans (as compared to fixed or standard loans) are policy loans on IUL that do not affect the performance of any index strategies in place. In other words, if a particular index strategy is in place, a participating loan would not require any segments that secure the loan to be discontinued and moved to the fixed account as collateral. Participating loans may also be called index loans, alternate loans or alternative loans.
Because IUL cash value never incurs investment loss, the insurance company can afford to use incomplete index segments as collateral for the loan without worry that they will shrink (other than for COI's and expenses). Thus, whatever the performance of the index strategy would have been without a loan, it will still perform the same. Duplifunding makes use of participating loans. This is especially useful when saving money for retirement.
The interest rate charged on a participating loan can be variable, such as being tied to The Moody's Seasoned AAA Corporate Bond Index, or a predetermined rate set by the company. Those participating loans tied to the bond index often have a maximum rate, or cap, that can be charged. These rates usually are not lower than 4% or higher than 6%.
The confusion comes when a participating loan has a fixed rate. This should not be confused with a Fixed Loan, which would require the liquidation of any active index segments up to the amount of the loan. Those segments are transferred to the Fixed Account of the insurance company. Also, it is possible for a variable loan (any loan that allows the insurance company to charge a variable interest rate) not to be a participating loan, despite the fact that many people mistakenly equate variable loans with participating loans.
Participating loans, whether at a fixed, variable, or variable rate with a cap, offer the possibility of leverage. Leverage can result in making a spread or net gain on funds that are borrowed. (Back to IUL Table of Contents)