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Is it true there is a difference in a Life Insurance company’s “in advance” or “in arrears” loan rate?

The answer is NO.

The insurance companies have really confused this issue ( In Advance vs In Arrears) because they mistakenly call it a “rate” when it is not. The in Advance “rate” should be called a factor because all it is for is to multiply the loan amount by to determine the payment when made up front. Any loan balance is charged the In Arrears rate (which is an actual rate) even if the loan payment is made in advance. The reason the loan payment is less is simply because when you make a payment up front, there is a lower loan amount to apply the interest charge to. The way it is stated in most illustration gives the false impression that you can pay at a lower rate when you make payments in advance. Again the rate charged is ALWAYS the in Arrears rate on any outstanding balance regardless of whether the loan is paid in Advance or in Arrears.

Using the Loan Analysis Calculator with one that I know for clarification – 8% in Arrears and 7.4074% In Advance with a loan of $10,000 over 5 years I will use an annual loan just to simplify the understanding (it works the same way if it is monthly but harder to keep the numbers straight).

  1. Put in the full loan amount with the in Arrears loan rate and set when the payment is made to BEG of period so..
    “A” for compounding period, 10,000 “Loan Balance”, 8% “Annual Loan Rate”, 5 “Illustration Period”, and “Beg”. -> you will see an “Annual Payment” of $2,319.04
  2. Put in the loan balance AFTER the first payment is made with the in Arrears loan rate and set when the payment is made to END of period so..
    “A” for compounding period, 9,259.26 “Loan Balance” { 10,000 * (1-.074074) }, 8% “Annual Loan Rate”, 5 “Illustration Period”, and “End”. -> you will see an “Annual Payment” of $2,319.04 – EXACTLY the same as the first example. You might also notice that the first year “Interest Charged” is the same 740.74 which might make you think the rate charged is 7.4074% but remember that it is based upon a 9,259 Loan NOT 10,000 (9,259 * .08 = 74074).

Like I said before, this is confusing because of the way the insurance companies have incorrectly chosen to call the “In Advance” number a rate. There is NO advantage or magic in paying a loan in Advance, there is just less money actually borrowed because if I make a 740.74 payment “In Advance” then I only borrowed 9,259.26 -> that’s why the payment is smaller, the interest rate charged on the outstanding balance is still the same 8% – NOT 7.4074%. The only thing the “In Advance” number does is provide a factor to calculate the first upfront payment – it is NOT a rate charge. The interest actually charged is ALWAYS the in Arrears rate regardless of when the payment is made.

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