Breaking The Idea On Borrowing From Life Insurance

A client recently asked me about life insurance policies that allow you to borrow money, and based on the way she phrased the question, I could tell there was some confusion about how borrowing from life insurance works. So let me break it down.

People often hear about borrowing from their life insurance and think it means they can borrow from the policy’s total insurance amount—for example, if they have a $100K policy, they believe they can borrow up to $100K. But that’s not how it works. With policies that allow borrowing, you’re paying a higher premium up front. Part of that premium goes into a separate savings component known as the “cash value.” Essentially, the company forces you to save into that account, but not for your benefit—it’s for theirs. Here’s why:

The cash value is something you can borrow from after several years of holding the policy. But even though it’s your premiums that fund the account, the insurance company will still charge you interest to “loan” you that money. Think of it like this: when you deposit money in a bank, you’re essentially loaning the bank your money. In an insurance policy, your cash value is used to reduce the company’s risk in insuring you. When you pass away, most policies only pay out the death benefit. Whatever the total in the cash value account was, the company keeps that amount. In the end, they only had to pay the difference between the cash value and the death benefit.

Also, You’ll often see agents bragging about the “tax efficiency” of these policies, but let’s be real—who pays taxes on a loan? Of course, it’s tax-free when you borrow from your cash value because loans aren’t taxed in the first place. It’s just a sales tactic to make the product sound better, when in reality, you’re still paying interest to access your own money.

It makes little sense to be charged more just to access your own money when there are far better vehicles to invest in. With a life insurance policy that builds cash value, you’re essentially paying extra for a forced savings plan, only to get charged interest when you want to borrow against it. Instead, you could be investing that money in vehicles like a 401(k), Roth IRA, or brokerage account, where your money grows more efficiently, stays accessible, and you won’t have to pay to “borrow” it back.