How Cash Value Life Insurance Policy Loans Work and Why They Are Misunderstood
In this second part of our Banking Without the Bank series, we are going to tackle one of the most misunderstood parts of whole life insurance: policy loans.
Most people are confused about how these loans actually work. They often think:
I am borrowing my own money.
My cash value disappears if I take a loan.
Paying interest to access my own money seems like a ripoff.
The truth is very different, and understanding it can change the way you view life insurance forever.
The Truth About Policy Loans
You are not borrowing your own money.
The insurance company lends you money from their general fund, using your cash value as collateral.Your cash value does not disappear.
The full cash value continues to earn interest and dividends, even while a loan is outstanding. A lien is simply placed on the portion you borrow.Interest is not a penalty.
The interest you pay is the cost of using the carrier’s money while your own continues compounding uninterrupted. It is a tool for liquidity, not a fee for accessing “your” dollars.
A Real-World Analogy
Think of a home equity loan.
You own a $500,000 home.
You borrow $150,000 using the home as collateral.
Even with the loan outstanding, if the property appreciates 5% in year one, the gain is based on the full $500,000, not the $350,000 of “remaining equity.”
That is exactly how whole life policy loans work. Your full cash value keeps growing, regardless of the loan.
How Policy Loans Work Step by Step
Request a loan from the carrier (online, by phone, or with a simple form).
The carrier lends you money from their general account.
Your cash value is used as collateral.
Funds are wired to your bank account within days.
You decide how and when to repay the loan.
No credit check. No lengthy approval process. Just access to liquidity secured by your policy.
Why This Matters
Policy loans give you leverage without sacrifice.
Your money compounds uninterrupted, even on borrowed amounts.
Loans are private, require no approval, and do not affect your credit.
You can use funds for investments, business growth, real estate, or major purchases.
You reduce reliance on banks and create your own source of financing.
Unlike other assets, your policy continues to appreciate regardless of market conditions.
Common Questions
What if I never repay the loan?
The balance is deducted from your death benefit. For example, if your policy’s death benefit is $1 million and you have a $150,000 loan balance, your beneficiaries receive $850,000.
Can I take multiple loans?
Yes. As long as you have available cash value, you can take multiple loans at once.
Are loan interest rates fixed or variable?
It depends on the carrier and loan type. As of today, rates are generally 5%-6%.
What can I use the loan for?
Anything. Most commonly: business expansion, real estate, investments, or large personal purchases.
Final Thought
Do not fear the policy loan. It is not about borrowing from yourself. It is about letting your dollars work in two places at once.
Your cash value continues to grow at a guaranteed rate while you use the insurance company’s money to pursue opportunities, make purchases, or fund investments. This is leverage with control and leverage with guarantees.
Ready to Learn More?
If you want to see how policy loans could fit into your financial strategy, schedule a complimentary discovery call today.
