Insurance Company Term Loans

Insurance companies and certain other institutional lenders also extend term loans to companies. The important differences are in the maturity of the loan extended and in the interest rate charged. In general, life insurance companies are interested in term loans with final maturities in excess of 10 years. Because these companies do not have the benefit of compensating balances or other business from the borrower, and because their loans usually have a longer maturity than bank term loans, typically the rate of interest is higher. To the insurance company, the term loan represents an investment and must yield a return commensurate with the costs involved in making the loan, the risk, the maturity, and prevailing yields on alternative investments. Because an insurance company is interested in keeping its funds employed without interruption, it normally has a prepayment penalty, whereas ordinarily the bank does not. One of the simpler prepayment formulas calls for a premium of .25 percent for each year remaining to maturity.

Insurance company term loans generally are not competitive with bank term loans. Indeed, they are complementary, for they serve different maturity ranges.