This post is part of our Frequently Asked Questions resource page.
Life insurance policy loans are one of the least understood aspects of the Infinite Banking strategy. In fact, many insurance agents have been banned from selling insurance through different companies, simply because they portrayed loans incorrectly.
It’s a common belief that, just like a bank account, your policy allows you to take loans from your cash value, and pay yourself back the principle and interest. This, however, is not the case.
The cash value of your policy is simply that… cash value… a value given to the policy based on a variety of factors (time, contributions, health, etc). It is not a cash account, or side fund, of any kind. It is also described as the dollar amount the insurance company will send you if you cancel your policy.
When you take a policy loan, those funds are offered to you by the insurance company with your policy cash value acting as collateral. When you make payments back, they are paid to the insurance company and not to your policy. To clarify even deeper, there is no relationship between those payments and your policy. It is not credited back to you directly in anyway. The funds go back to the insurance company’s resources, and are calculated into the dividend they eventually distribute.
This misconception is unfortunate because paying the insurance company is, in my opinion, in your best interest. It is my experience that you will cheat yourself, and being required to pay the insurance company gives you a greater sense of responsibility. Additionally, when you borrow for certain purposes (like business and investments), the interest can be tax deductible, which would not be an option if you were to, indeed, pay yourself back directly.
Keep in mind this has almost the same outcome as paying yourself, but with slight differences that need to be taken into account when borrowing.
If you are looking for additional information, please contact us, or comment below.
Jake