I get asked about policy loans all the time, and the real answer has less to do with the interest rate than most people expect. Here is how I think about borrowing against cash value and why control matters more than the rate.
Why would I pay interest to borrow my own money?
This question comes up every time someone starts researching the infinite banking concept. It makes perfect sense that it would. The assumption at first is that you’re borrowing your own money, and that isn’t what’s happening. You’re accessing the life insurance company’s money, and your cash value is the collateral.
Think about owning a house. Say your home is worth a million dollars and the bank qualifies you for a $600,000 line of credit. The bank doesn’t hand you bricks, drywall, or kitchen cabinets. The house stays intact. It’s the collateral for the loan. A policy loan works the same way. Your cash value stays in the contract and keeps growing, and the insurance company lends you its own money against that collateral.
How does a policy loan actually work?
Start with a dividend-paying whole life insurance contract. It begins accumulating cash value right away, and the life insurance company guarantees that collateral. That’s why you can request a policy loan from the insurer with no credit check, no income verification, and none of the underwriting you’d face anywhere else. There’s also no repayment schedule.
Let me walk through a car purchase the way I picture it. You need a $50,000 vehicle and you have $75,000 of cash value. You call the life insurance company and ask for a policy loan. They tell you that you have more than enough collateral and ask whether you want the money deposited directly or mailed as a check. Then you ask about repayment, and the answer is that it’s up to you. You’re the policy owner. They just administer the contract.
Now the policy owner says, “Wait a second. You’re depositing $50,000 into my checking account, I control the repayment schedule, and my $75,000 of cash value keeps rising while I drive the car?” Yes. And if something happens to you, your family still owns the vehicle, and the death benefit is paid to your beneficiaries income tax free. People usually respond with a very simple “What?” I get it. The value of the control you gain here is unmatched.
What is the value of control in financing?
The interest rate is visible. The value of control isn’t visible until the day you need it. That’s the heart of this whole conversation. Consumers who borrow can become obsessed with interest rates and completely ignore the control they gain. The cheapest loan on paper can become the most expensive loan in your life. A missed opportunity, a delayed approval, or poor timing can cost far more than a lower rate saves. Yes, the interest rate was low, but the total cost wasn’t.
Ash made a great point when we talked about this. People don’t appreciate liquidity and flexibility until their financial circumstances change. Think back to any time you’ve gone to a bank hat in hand with a big stack of paperwork to justify why you deserve the money. Maybe you were even denied. Ask yourself how that felt and whether you’d want to go through it more than once. If the answer is no, it’s worth thinking about how to put yourself in a position where you control your own access to liquidity.
I’m not knocking banks. Underwriting exists for good reasons, and regulations are in place to prevent predatory lending to people who have no business borrowing. Underwriting has its place. My point is that when you own a participating policy, the process looks completely different, and right in the middle of any financing decision you get one of two things. You get peace of mind, or you get tension and friction.
Do interest rates still matter with policy loans?
Of course rates matter. I’m not suggesting anyone ignore them. What I’m saying is that the rate is only one variable. You’ve also got control, liquidity, certainty, flexibility, and ready access to capital on demand and on your terms. If you ignore all of that, you’re only processing part of the equation.
Ash pointed out that we’ve been conditioned to focus on the rate and nothing else. When we look at only one piece, we can’t see how everything else might work for us or against us. We also tend to look only at our need right now and forget our need later. If you want to do things smart, you have to weigh both.
My own experience makes this concrete. I’m going into my 19th year of implementing this process in my family, and I couldn’t tell you the last time I compared 3% financing to 6% financing. I don’t compare that anymore. I compare the financing experience. Mine is peaceful and stress free, and I happen to value that.
What are the risks of having no repayment schedule?
I want to be honest about this one. Policy loans do not have a repayment schedule, and that can be dangerous if someone is irresponsible. If you’re financially responsible, being in a position of total and absolute control has real advantages. Without that discipline, the same freedom can work against you.
There’s another side to repayment that I love. When we send money back to the life insurance company, we replenish its general account, or participating account depending on which side of the border you’re on. Then we get to re-access everything we repaid, plus more. Ash called that the definition of flexibility, and I agree.
How often do you really need financing in life?
More often than most people think. Your need for finance shows up every few years. You’ve got cars, business equipment, renovations, real estate, taxes, and education. The question isn’t whether you’ll ever finance something. The question is who controls the financing function.
Whether you pay cash, lease, or finance a car, every one of those methods involves a permanent transfer of money away from you. Ash made a good point here. You can keep starting, stopping, and restarting the cycle of saving and spending, always beginning from zero with nothing accumulating. Or you can leverage an asset you already have in place.
In my family, we have 78 policies in our family banking system and $1.57 million in premium this year. Every year, when we need vehicles, renovations, or kitchen appliances, the money that would have left the family permanently is making its way back. Opportunities also track you down when you have capital. What is immediate access worth on the day your perfect investment opportunity appears? What is certainty worth during a recession or a financial crisis? Ash mentioned people who are still recovering from what happened during COVID, when revenues vanished and businesses closed through no fault of their own. How they were structured financially made a big difference.
Is the infinite banking concept about avoiding interest?
No. It’s about improving the financing experience. That’s a completely different objective, and you improve it by taking control of it. Rather than compare percentages, compare the systems. Ash put it well when he said we’re not telling anyone to stop comparing. We’re saying compare things in the same class. If a system exists that gives you more control, why wouldn’t you look into it?
It isn’t an overnight deal either. My steps were simple. I was introduced to the concept in July of 2008. I figured out what premium was comfortable and affordable, and that premium pays for dividend-paying whole life insurance. We started with one policy, and it expanded gradually into a system of policies, which is what R. Nelson Nash suggested as the optimal way to implement the process. We periodically took policy loans. We didn’t reduce the asset’s value and we didn’t trigger a taxable event. We’re also diversified in lives insured. People die, and when that happens the death benefit is paid income tax free, so the family gets replenished and the process continues uninterrupted.
My late mentor taught us to evaluate the banking process and who controls it. It’s a profound shift in thinking. You’re either in control or you’re being controlled. There’s no third option.
Where should you start learning about Becoming Your Own Banker?
Read Becoming Your Own Banker by R. Nelson Nash. It’s a 92-page book, and it opened my eyes to a whole new financial world when I read it in 2008. Nelson never sensationalized the process, and he didn’t have to. If you understand the problem infinite banking is trying to solve, everything falls into place. Ash made the point that most people aren’t being taught this, especially with all the noise and magical solutions being sold out there.
Think about your own financial life for a moment. How many decisions have you made based solely on an interest rate? How many times did you stop and ask who’s controlling the financing function for your needs? People who implement this process don’t ignore rates. They just refuse to let the rate become the whole conversation.
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