• David H. Kinder, ChFC

Myth #9 - Paying to Borrow My Own Money is a Scam!

Updated: Dec 28, 2019


This is another misconception that floats around out there, so allow me to help clarify this.

  1. If we look at life insurance as property (and there are MANY comparisons), then we are borrowing against the accumulated cash values in the property – exactly like we would borrow against the equity of a home. When we borrow against the value of a home, we pay interest. This works exactly the same way (except it is not tax-deductible).

  2. Within a life insurance illustration, there are promises of returns to be made by the insurance company. If or when you borrow against the policy, the insurance company no longer has those funds to generate the promised return. In order to have the revenue to pay the promised returns, interest must be charged.

There are generally two ways to take out life insurance loans – fixed or variable rates. Fixed rates are exactly that – fixed for the term of the loan. One such company has a fixed 8% rate on their loans. The problem with fixed rates is that they may not be competitive for the current interest rate environment. Right now, most variable insurance loan rates are around the same interest crediting rates of the policy, between 4% - 5%.

As far as policy performance, it really doesn’t matter which you choose. Let me explain with some sample numbers:

If you have $100,000 in cash value in your policy, and it earns 4%, you will earn $4,000 for the year.

If you take out a $50,000 loan against the policy values, and your loan charges 4%, you will have loan interest of $2,000 per year.

  • If you don’t pay the interest back to your policy out of pocket, then $4,000 earnings - $2,000 loan interest = $2,000 net earnings.

  • If you DO pay the interest back to your policy out of pocket, then $4,000 earnings - $2,000 loan interest + $2,000 interest payment = $4,000 annual policy earnings.

What you're doing is reimbursing your policy out of pocket for the interest charged so your policy will continue to perform and grow as needed.

Sounds simple enough, right? Well, someone will want me to ‘prove’ it… so here we go:


In this example, we are paying $10,000 per year on an Assurity Life maximum-funded whole life policy for 10 years that was taken out at age 35, with standard, non-smoking underwriting classification. (This illustration is for an example only and is NOT a solicitation to buy insurance.)

In year 11, we take out a $50,000 loan while still paying the annual policy premiums of $10,000 per year + the annual loan interest being reimbursed back to the policy. Then in year 15, we repay the original $50,000 loan.

What we’re looking for is if you can keep the interest payment that you are paying back into the policy (reimbursing the policy for interest charged).

Year 11: Is the year we take out the loan.

  • Notice the lower dividend compared in year 10 vs year 11, as this is a direct recognition policy. That means that when dividends are paid, it takes the outstanding loan into account as to how much of a dividend to pay.

  • The loan interest per year is calculated to be $2,115 each year based on current interest and loan rates. (Notice that the payment per year increased from $10,000 to $12,115 to account for the loan interest.)

Year 12:

  • End of policy year 11 total cash values: $67,161

  • Dividends paid with loan: $1,663

  • Loan Interest paid out of pocket: $2,115

  • End of policy year 12 total cash values: $81,405

  • $81,405 - $10,000 (current year premium) = $71,405

  • $71,405 - $67,161 (end of policy year 11 values) = $4,244 total gain.

  • Dividends paid: $1,663 + Loan interest: $2,115 = $3,778.

  • $4,244 total gain – $3,778 = $466 net policy gain.

You still have a gain in the policy even while paying loan interest and receiving ‘direct recognition’ dividends. This is why I say that you can keep the money you were sending to banks and credit card companies when you borrow from your life insurance policy and reimburse the interest payments back to your policy!

Year 13:

  • End of policy year 12 total cash values: $81,405

  • Dividends paid with loan: $1,909

  • Loan Interest paid out of pocket: $2,115

  • End of policy year 13 total cash values: $96,301

  • $96,301 - $10,000 (current year premium) = $86,301

  • $86,301 - $81,405 (end of year 12 policy values) = $4,896 total gain.

  • Dividends paid: $1,909 + Loan Interest: $2,115 = $4,024

  • $4,896 total gain - $4,024 = $872 net policy gain.

Year 14:

  • End of policy year 13 total cash values: $96,301

  • Dividends paid with loan: $2,171

  • Loan Interest paid out of pocket: $2,115

  • End of policy year 14 total cash values: $111,892

  • $111,892 - $10,000 (current year premium) = $101,892

  • $101,892 - $96,301 (end of year 13 policy values) = $5,591 total gain.

  • Dividends paid: $2,171 + Loan Interest: $2,115 = $4,286

  • $5,591 total gain - $4,286 = $1,305 net policy gain.

Year 15:

  • End of policy year 14 total cash values: $111,892

  • Dividends paid with loan: $2,427

  • Loan interest paid out of pocket: $2,115

  • End of policy year 15 total cash values: $128,204

  • $128,204 - $10,000 (current year premium) = $118,204

  • $118,204 - $111,892 (end of year 14 policy values) = $6,312 total gain

  • Dividends paid: $2,427 + Loan Interest: $2,115 = $4,542

  • $6,312 total gain - $4,542 = $1,770 net policy gain.

My common sense tells me, based on an analysis of these numbers, that the policyholder KEEPS the interest payment that they reimburse back to their policy on any outstanding loans!

Now, what happens if you DON’T reimburse the interest back to your policy each year out of pocket?


Year 12:

  • End of policy year 11 cash values: $65,017

  • Dividends paid with loan: $1,603

  • Loan Interest Paid Out of Pocket: $0. Interest added to balance of loan.

  • End of policy year 12 cash values: $76,995

  • $76,995 - $10,000 (current year premium) = $66,995

  • $66,995 - $65,017 (end of year 11 cash values) = $1,978 total gain.

  • $1,978 – $1,603 = $375 net policy gain. (You will notice this is lower than the previous example.)

Year 13:

  • End of policy year 12 cash values: $76,995

  • Dividends paid with loan: $1,817

  • Loan Interest Paid Out of Pocket: $0. Interest added to balance of loan.

  • End of policy year 13 cash values: $89,499

  • $89,499 - $10,000 (current year premium) = $79,499

  • $79,499 - $76,995 (end of year 12 cash values) = $2,504 total gain.

  • $2,504 - $1,817 = $687 net policy gain.

And I think you’ve got the idea.

Why does this work like this?

  1. The loan is only 50% of the cash values at the time the loan is taken out. If the loan was larger, you might not have a gain.

  2. Premiums on the policy are still being paid and new premium is earning more and more return as the policy ages. Just as when we take out a home equity loan or line of credit, we don't stop making our regular mortgage payments. (However, unlike with a home, you CAN skip payments if you need to, as long as you have cash values to help sustain the policy for a period of time.)

  3. Additional policy riders may impact policy performance. This policy had no additional riders at a cost.

Bottom line: Yes, you are paying to borrow your own money. However, as you can tell, you DIRECTLY BENEFIT from reimbursing your policy the interest payments back to the policy each year.

Do all policies work like this? I cannot say for certain. Some policies will pay you a given dividend regardless of outstanding loans!

If you would like some additional information on the subject, here is an excerpt from The Tools and Techniques of Life Insurance by Stephen Leimberg on the subject of life insurance policy loans: Click Here

David H. Kinder | Lifetime Tax & Wealth Educator

Dynamic Advanced Insurance, Financial, and Retirement Strategies

#combatingmisconceptions

73 views

3578 Atchison Circle
Riverside, CA  92503-5166 

Phone & Text: 

951.313.8208

Regulatory Disclosure:

David H. Kinder, ChFC® is regulated by the California Department of Insurance as a life, accident & health insurance agent (CA Insurance License #0E54187)​.  This communication is strictly intended for individuals residing in the state(s) of CA. No offers may be made or accepted from any resident outside the specific states referenced until proper state insurance licensing and company appointments are secured for that given state. David Kinder Insurance and Financial Solutions is the marketing name for David H. Kinder, ChFC® and is not affiliated with any other company.  Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Guarantees do not apply to the performance of any particular index option on fixed indexed insurance contracts, or on projected dividends on participating insurance contracts.  Not all recommendations necessarily require insurance product purchases. Not all products are appropriate or available for all situations. Results are not guaranteed and are subject to individual situations and circumstances. Listing company client access links under the "Client Access" menu does not constitute any endorsement, filing, or approval of this website or its content by such listed companies.  Client access links are provided for client convenience only.

Not Legal, Tax, or Securities Investment Advice:

The material discussed on this web site is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice, nor does it represent any specific company or specific products.  David H. Kinder, ChFC® is not registered nor licensed as a Registered Investment Advisory Firm (RIA), Investment Advisor Representative (IAR), nor as a Registered Representative (RR) with any broker/dealer firm, and is therefore not registered with, or supervised by, the U.S. Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), or any state securities regulatory office.  As such, David H. Kinder, ChFC® does not provide investment advice, specifically: buying, selling, holding, risk analysis, or any other analysis of securities, nor the asset allocation of securities portfolios. For specific investment advice on your securities investment portfolio, please contact a licensed and registered investment professional in your state.

He does offer general investment information for educational purposes and may propose alternative financial strategies that do not contain or include securities. He does also discuss the pros and cons of various kinds of accounts (such as IRS Regulated Retirement Plans) and is considered incidental advice surrounding various strategies and solutions, but does not necessarily constitute advice on the underlying securities.  

For tax or legal services and advice, please consult a licensed professional in your state.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary and the information should be relied upon only when coordinated with individual professional advice.

The ChFC® is the property of The American College of Financial Services, which reserves sole rights to its use, and is used by permission.  

© David Kinder Insurance and Financial Solutions; All Rights Reserved

Privacy Policy