There’s a lot of buzz around using life insurance cash value for loans—some of it rooted in truth, and some driven more by marketing hype than math. Like many financial decisions, this one depends on the situation. Here’s my take, with a few made-up numbers to illustrate what I mean.
Let’s get one thing straight: the decision to borrow against your life insurance policy should come down to strategy, not sales pitches. That means understanding when it makes sense—and when it doesn’t.
When It Does Make Sense to Borrow from the Insurance Company
1. To Make a Deal Happen That Otherwise Couldn’t
This isn’t about math—it’s about saving the deal.
If you’re almost done with a shopping center but run out of cash and the banks won’t touch it, you’ll pay anything to finish. The cost of a short-term loan is irrelevant compared to losing the entire project.
2. To Shore Up a Troubled Investment
Sometimes, you’re not looking for an opportunity—you’re protecting what you already have. A vacancy or a capital repair in a real estate deal could cripple your cash flow. If your policy’s cash value can bridge the gap, it might be a lifesaver.
3. When the Opportunity Earns More Than the Loan Costs
This is the most common reason cited—and it’s valid. If you can earn a higher net rate of return on an investment than what you’re paying in interest on your policy loan, you’re creating positive arbitrage.
4. When Convenience Outweighs Cost
Sure, the bank might offer a lower rate—but if they want collateral you don’t want to give, or you’re tired of the paperwork circus, a policy loan might be worth a slightly higher cost.
5. To Act Fast on a Time-Sensitive Opportunity
Speed matters. If a killer real estate deal shows up but the bank needs weeks to underwrite, you can borrow against your policy today and refinance with the bank later. The life insurance loan becomes your fast pass to opportunity.
When It Doesn’t Make Sense to Borrow from the Insurance Company
1. When the Loan Rate Exceeds the Net Return
If the loan costs more than what you’ll earn on the opportunity (after taxes and fees), it’s a losing proposition. Full stop.
2. When You’re Just Paying Expenses
Borrowing to fund day-to-day expenses means you’re just turning costs into more expensive costs. Unless it’s a short-term survival move, it’s not going to be worth it.
3. When the Policy Is Bought Just for Loans
Buying life insurance just to borrow against it is flawed thinking. The truth is: you don’t “get the interest back” when you take a life insurance loan. That idea is pure myth. The growth of the policy and the cost of borrowing are separate decisions. Treat them that way.
The Net policy IRR is never going to out perform the loan rate and it’s the wrong conversation to have anyway. This may be a little confusing because of the hype in the industry around false statements like “WE get the interest we pay on a life insurance loan” – totally false.
The loan and the growth of the life insurance policy cash value should be two totally independent considerations. You want the life insurance because it’s a safe and liquid warehouse for your wealth that has good, dependable growth.
You want policy loans because they’re easy to use, give you control over your capital, and you might get a better interest rate from the insurance company than you would the bank. Your decision to secure your funding from your policy over another option has nothing to do with how your cash value is growing.
The Math Matters, Yet So Does the Context
Sure, most of this is math. But it’s also about control, strategy, and long-term thinking.
Let’s say the insurance loan rate is 5.5% and the bank is charging 6.5%. You might still choose the bank—why? Because you want to preserve access to your policy’s cash value in case of a future emergency or opportunity. If you burn through that capital now, the bank might not help you later.
Control doesn’t come from the loan—it comes from having available cash value.
The flexibility to choose your loan source, skip a payment, or act fast when a deal comes up—that’s what matters. And you only get that if you’ve protected your liquidity.
Todd's Two Cents
I know the power and certainty of being in a cash position where I am not at the mercy of a bank. I, therefore, will choose the bank even when they have a higher rate (within reason) than the insurance company so I can keep cash control from a source I don’t have to ask permission to use.
The reason for this is that if I have an emergency and I have used up my cash value opportunity with other loans, the bank will probably not loan me money to get me through the issue.
Also, if that “Deal of a Lifetime” comes along, I want to be in a position to take advantage of it without waiting on a bank to make a decision.
So often, what I see in the life insurance industry is the idea of “Control” being applied to a life insurance LOAN.
It’s not the loan that gives the control, it’s the AVAILABLE cash value and that AVAILABLE cash value gives me control of ANY loan – not just the loan from the insurance company. I can’t skip a bank loan payment like I can with a life insurance loan but I can borrow the payment from the life insurance company to make the payment at the bank (the same thing the insurance company does internally when I skip a payment with them).
A Quick Illustration
So, what if you have a new 30-year mortgage of $400,000 and then life happens, and you find yourself unable to make payments for an extended time? If you have available cash value, this is an instance when that liquidity can really help (and just proves the value of having AVAILABLE cash).
So, let’s assume a Bank Loan rate of 6.5 and a Life Insurance Loan rate of 5.5. I also assumed the life insurance loan would increase each month by the payment of the Primary Bank Loan so nothing would come out of pocket for 36 months.
Then, in month 37, they would start paying the Primary Loan out of pocket ($2,528) + start applying $1,000/month to the Life Insurance Loan (which pays off in month 168) for a total out of pocket of $3,528.
Even though the life insurance loan gets paid off in month 168, let’s assume we keep applying that $1000/month. It will accumulate at approximately 4% in a whole life insurance policy with a mutual company, starting at month 168 and on.
Truth Concepts Enables You to See the Full Picture
I’ve seen too many advisors sell policy loans as the ultimate solution to everything. Yet life insurance is a nuanced asset. It can absolutely unlock incredible opportunities—yet it’s critical that you develop a habit of looking at every angle. That way you can determine the best PERSONAL path forward for yourself and your clients.
And that’s exactly what Truth Concepts helps you do.
Want to run the numbers yourself? Download the free trial of Truth Concepts software today and see exactly how these strategies work in your real-world scenarios.
2 Responses
Do you mean $1000/mo vs $100/mo?
So this person gets back to work and has the “ability” to pay off the life loan with $1k, then still has the ability to save it correct?
To add money to a life policy – do you mean a new one, or that the policy “might” have the ability to add pua?
Finally, the “value of extra payments” is at interest correct?
Hi Gina, thanks for your questions.
You’re correct, the $1,000 a month would be what this person is able to contribute once they have cash flow again, whether that is getting back to work, or their investment is cash flowing. Once the policy loan is paid off, we’re illustrating the continued contributions as additional PUA, so yes, those extra payments are at interest.