A policy loan has an interest rate. That part is easy to identify. The harder question is what the loan actually costs when your whole life insurance policy is still accumulating cash value.
In the accompanying video, Steve walks through a real estate investor's illustration to compare cash value growth with policy loan interest—first year by year, then over the longer term.
The comparison is useful, but the two figures answer different questions. To evaluate borrowing properly, we also need to know what the policy would have done without the loan and what the borrowed money is being used for.
What Does “Net Cost to Borrow” Mean?
When someone asks for the net cost of a policy loan, they may be looking for either of two things: the interest charged by the insurer, or the overall financial effect of borrowing while keeping a cash-value policy in force. Those are related, but they are not the same.
Steve approaches the question by looking at the policy in two ways: percentages and actual dollars.
One detail matters here: a dividend interest rate is not the same thing as the policyholder's annual cash value return. Whole life policies have insurance costs and other policy mechanics, especially in the early years. You need the actual illustrated cash values to evaluate the dollar changes.
The Example: A $500,000 Policy Loan at 5.77%
Steve's example involves a real estate investor who plans to fund a whole life insurance policy with $125,000 per year for four years, for a total of $500,000 in premiums.
In policy year six, the illustration assumes a $500,000 loan. The borrower pays loan interest and also makes annual payments of $50,000 toward principal.
That distinction is especially important for anyone planning to keep a large balance outstanding over many years. A higher variable rate would change the interest cost and potentially the policy's long-term sustainability.
What Does the First Loan Year Actually Show?
This is where the illustration gets interesting. In the year the $500,000 loan is taken, Steve compares two amounts: the policy's illustrated cash value growth and the interest charged on the new loan.
Notice what happens with the percentages. Steve shows an annual cash value yield of roughly 5.14%, while the loan interest rate is 5.77%. At first glance, the loan rate is higher.
Yet the illustrated annual cash value growth is slightly greater than the interest charged. How can both be true? Because the percentages are applied to different amounts. The yield reflects the underlying policy's cash value, while the loan interest applies to the amount borrowed.
The policy can continue accumulating cash value while a loan is outstanding. However, how a loan affects dividends depends on the contract, including whether the insurer uses direct or non-direct recognition.
And there is one other important point: much of that projected policy growth would have occurred even if the investor had never borrowed. That is why the $310 difference should not be treated as the economic return on the loan itself.
How Is Annual Cash Value Growth Calculated?
Steve walks through a straightforward way to isolate the amount the policy is projected to add in a given year, excluding new premium payments.
For the first year in Steve's example, the policyholder pays $125,000 and has about $115,200 in cash value. The difference is approximately negative $9,800. That early-year shortfall reflects policy costs and design; it is not unusual for the first-year cash value to be below the premium paid.
The important comparison is not the dividend rate alone. It is the actual change in cash value, net of new premiums, alongside the loan interest and any other relevant policy cash flows.
What Do the Numbers Look Like After 20 Years?
The illustration then follows the policy over time while the investor pays loan interest and reduces the principal balance by $50,000 annually.
By policy year 20, at age 65, Steve shows approximately $1.23 million in cash value and $1.771 million in death benefit. His spreadsheet also totals the projected policy gain and loan interest across the period.
It is reasonable to look at these amounts side by side to understand the policy's illustrated performance while a loan is being used. But they do not mean that borrowing $500,000 produced a $572,000 profit.
The $730,000 is projected growth in the policy over the period—not growth created by the loan. The $158,000 is interest associated with the loan. Those numbers do not include the profit or loss on the real estate investment, and they do not by themselves compare borrowing with the alternative of using cash or another credit facility.
What Does a Fair Borrowing Comparison Include?
To decide whether the policy loan makes financial sense, it helps to compare the borrowing decision—not just the policy illustration.
For example, the real estate investment might perform well, poorly, or somewhere in between. Its return is separate from the growth occurring inside the life insurance policy. If the investment loses money, the policy loan still has to be addressed.
The best comparison considers the timing of all cash flows. An annual illustration or an internal rate of return calculation can help, but only when the values being compared are defined consistently.
What Should You Request Before Taking a Policy Loan?
A useful starting point is a current in-force illustration, not just the original projection from when the policy was issued. Ask your agent to run the planned loan under several assumptions.
This is particularly important with adjustable loan rates. The video uses 5.77% across the projected period for consistency, but an actual loan may experience different interest charges over time.
The Bottom Line
To understand the true cost of a whole life insurance policy loan, start with the interest charged—but don't stop there.
Steve's example shows how a policy can continue accumulating cash value while a $500,000 loan is outstanding. It also shows why comparing dollar amounts can be more intuitive than simply subtracting one percentage rate from another.
The final decision, however, depends on what borrowing changes: your loan interest, dividends, net policy values, outside financing alternatives, and the outcome of whatever you do with the money.
Review those pieces together, and you can make a more informed decision about whether a policy loan fits your financial goals.
Watch: What Is the Net Cost to Borrow Against Whole Life Insurance?
Steve walks through the $500,000 example, showing the 5.77% adjustable loan rate, year-by-year projected cash value growth, loan interest, and the long-term illustration.
Watch the full video on YouTube
Compare Your Policy Loan Numbers
Thinking about borrowing against a whole life insurance policy? Connect with IBC Global to review in-force illustrations, loan-rate assumptions, repayment options, and how your policy could perform with and without borrowing.
Illustrations are hypothetical and may include non-guaranteed dividends. Actual loan rates, available cash value, dividend treatment, and net death benefits vary by policy. Policy loans accrue interest; excessive outstanding debt may cause a policy to lapse and can have tax consequences. This article is educational and is not individualized investment or tax advice.
