Loan Series 2: How Does Cash Value Keep Growing When You Take a Policy Loan?

When you withdraw money from a savings account, that money stops earning interest in the account. If you want to rebuild your balance, you'll need to put the money back.

But what happens when you borrow against a whole life insurance policy?

One of the features that makes whole life insurance different from a traditional savings account is the ability to access cash through policy loans while the underlying policy continues accumulating value.

That doesn't mean borrowing is free, or that every policy performs the same way. However, understanding how cash value growth works alongside an outstanding loan can help explain why some business owners and investors choose to use their policies for liquidity.

Let's compare three situations: using cash from a bank account, borrowing against real estate, and taking a whole life insurance policy loan.

Using Money From a Traditional Bank Account

Suppose you have $100,000 sitting in a bank account earning 5% annually.

An opportunity comes along, and you decide to use $50,000.

Before making that withdrawal, your entire $100,000 balance was earning interest. Once you withdraw half, you're left with $50,000 in the account.

Assuming the interest rate remains at 5%, your annual interest would decrease from $5,000 to $2,500.

You might earn a return on whatever you used that $50,000 for, but the withdrawn money is no longer earning interest in your bank account.

This is an example of opportunity cost: the potential growth you give up by using money for one purpose instead of another.

Now, there's nothing inherently wrong with spending your own money. In many situations, paying cash is the simplest and least expensive option.

But what if you could access funds without having to sell or withdraw the underlying asset?

That's where borrowing against an asset becomes interesting.

Borrowing Against Real Estate

Real estate provides a familiar example of how borrowing against an asset differs from selling it.

Let's say you own a property worth $100,000.

For simplicity, we'll assume the property appreciates by 5% annually, although actual real estate values fluctuate and appreciation is never guaranteed.

Now suppose you need $50,000.

Rather than selling half the property, you borrow $50,000 from a lender using the property as collateral.

You still own the entire property.

If the property's market value increases by 5%, its value rises to $105,000, regardless of whether you have that $50,000 loan outstanding.

Of course, the loan comes with a cost.

If the interest rate is 5%, you're paying interest on the $50,000 borrowed. You also have repayment terms, lender requirements, and potentially other expenses associated with the loan.

The important distinction is that the property's value and the outstanding loan balance are two separate things.

The property can appreciate while the loan remains outstanding. However, the loan reduces your equity, and you have to account for borrowing costs when evaluating the overall financial benefit.

Whole life insurance policy loans follow a similar principle, although the underlying asset and loan mechanics are different.

How Whole Life Insurance Cash Value Growth Works

Now let's use that same $100,000 example with a whole life insurance policy.

Suppose your policy has accumulated $100,000 in gross cash value, and you want to access $50,000.

Instead of withdrawing $50,000 directly from the policy, you request a policy loan.

The insurance company lends you money using your policy as collateral.

You now have two important figures to consider:

Immediately after a $50,000 loan, your net available cash value would be approximately $50,000, assuming there were no other outstanding loans or adjustments.

However, the policy's underlying cash value continues to develop according to its contractual guarantees and dividend provisions.

For participating whole life insurance, that can include guaranteed cash value increases and non-guaranteed dividends.

The effect of a loan on those dividends depends on how the insurance company treats borrowed cash value.

Some policies use non-direct recognition, meaning the insurer does not individually adjust a policyholder's dividends simply because a loan is outstanding. Other policies use direct recognition, which allows the company to treat loaned and non-loaned values differently when calculating dividends.

This distinction matters because it can affect the growth shown in a policy illustration.

What About the Loan Interest?

Let's continue with a simplified example.

Assume your policy has $100,000 in cash value and you take a $50,000 policy loan at a 5% annual interest rate.

The annual interest on that loan would be approximately $2,500 if the balance and rate remain unchanged.

Meanwhile, the policy continues accumulating value according to its terms.

If we hypothetically assume $5,000 in annual cash value growth, you're looking at two separate amounts:

These figures help illustrate why someone might want to explore policy loans, but they don't automatically represent a $2,500 investment profit.

Your actual financial outcome depends on the policy's costs, dividend treatment, interest rate, loan repayment, and what you do with the borrowed money.

The main takeaway is that the policy's accumulation process does not necessarily stop when you borrow against it.

Comparing All Three Approaches

Here's how the examples compare when someone needs $50,000 from an asset initially worth $100,000.

These aren't interchangeable financial strategies, and the costs and risks are different.

The comparison simply illustrates the difference between removing money from an asset and borrowing against it.

A $500,000 Whole Life Insurance Policy Loan Example

Let's look at the larger policy illustration Steve discusses in the accompanying video.

In this example, the policyholder funds a whole life insurance policy with $100,000 annually for 10 years.

That's $1 million in total planned premium payments.

The illustration shows a first-year cash value of approximately $92,000 after the initial $100,000 payment.

That difference is worth mentioning because whole life policies have insurance costs and other expenses that affect early cash values. The policy doesn't immediately provide dollar-for-dollar liquidity for every premium paid.

As the policy develops, cash value accumulates. Under the illustrated non-guaranteed assumptions, the policy reaches its cash value break-even point between years three and four.

Taking a $500,000 Loan

In year 11, after the planned premium funding period, the policyholder takes a $500,000 loan.

Before the loan, the illustration shows a death benefit of approximately $2,294,000.

After accounting for the $500,000 outstanding loan, the net death benefit is approximately $1,794,000.

The policyholder still has life insurance coverage, but the amount available to beneficiaries is reduced by the outstanding debt.

The net available cash value is also reduced.

This is important: taking a policy loan doesn't give you access to money without affecting your financial position. The loan is a real liability secured by the policy.

What Happens When the Loan Is Repaid?

In the illustration, the policyholder makes annual loan payments of approximately $100,000, which are applied toward loan interest and principal.

As the outstanding loan balance decreases, the net available cash value and net death benefit recover.

By year 18, the illustration projects approximately:

This demonstrates how the policy's underlying accumulation can continue while the loan is outstanding.

However, there is an additional factor to consider.

The policyholder also paid interest during the repayment period. Even if the projected policy values match after the loan is repaid, those interest payments are a real cost that must be included when comparing the two scenarios.

The question isn't simply whether the policy continued growing. It's whether the flexibility and use of the borrowed funds justified the borrowing expense.

Does Your Cash Value Always Keep Growing at the Same Rate?

Not necessarily.

Participating whole life policies generally include guaranteed cash values, but dividends are not guaranteed. Actual results can differ from what was originally illustrated.

Loan provisions also vary by insurance company and policy.

For example, a policy with direct recognition may calculate dividends differently on the portion of cash value securing an outstanding loan.

A policy with non-direct recognition may handle those values differently, but that doesn't mean the loan has no cost or that future cash value growth is guaranteed at the illustrated rate.

This is why it's important to look beyond the dividend interest rate.

When reviewing your policy, consider the actual annual increase in cash value, the interest charged on your loan, and how the loan affects your net available values.

An in-force illustration can help show how those figures may develop under different assumptions.

Why This Matters for Business Owners and Investors

For someone using a whole life insurance policy primarily for long-term financial planning, policy loans may provide a way to access funds without surrendering the coverage.

For business owners and real estate investors, the potential applications may be broader.

Consider someone who needs funds for a business expense, property improvement, or short-term opportunity.

A policy loan might provide access to cash while the underlying policy continues operating.

The borrower can then evaluate how to repay the loan based on the timing of their expected cash flow.

Of course, the opportunity itself carries its own risks. Borrowing against life insurance doesn't make a real estate investment profitable or guarantee a business will generate a return.

And if the loan remains outstanding, interest continues to accumulate. A growing loan balance can eventually threaten the policy if it isn't managed appropriately.

Still, the ability to access funds without immediately surrendering an existing financial asset is a feature worth understanding.

The Bottom Line

So, does your cash value keep growing when you take a whole life insurance policy loan?

Yes, a properly maintained whole life policy can continue accumulating cash value while a loan is outstanding.

The loan doesn't automatically stop the policy's underlying accumulation, although dividend treatment, borrowing costs, and available cash value vary by contract.

That's what makes policy loans different from simply withdrawing cash from a bank account.

But continued growth is only part of the equation.

Before deciding whether to borrow, it's important to understand the cost of the loan, how the insurance company calculates dividends, and what happens to your policy under different repayment scenarios.

The best way to evaluate those questions is through a detailed policy illustration showing both the growth of the underlying policy and the effects of borrowing.

Watch: Why Take a Loan From Your Whole Life Insurance Policy?

In the accompanying video, Steve compares using cash from a bank account, borrowing against real estate, and taking a whole life insurance policy loan.

He also walks through a $500,000 loan illustration to demonstrate how cash value and the net death benefit change during repayment.

Watch the full video on YouTube

See How Policy Loans Affect Your Cash Value

Every whole life insurance policy has its own loan provisions, interest rates, and dividend treatment.

If you're considering borrowing against your policy, connect with IBC Global to review your illustration, compare loan scenarios, and better understand how borrowing could affect your long-term cash value and death benefit.

Policy illustrations are hypothetical and may include non-guaranteed values. Policy loans accrue interest and reduce available cash value and death benefits while outstanding. Excessive borrowing may cause a policy to lapse and create adverse tax consequences.