To Borrow or Withdraw from a Banking Life Insurance Policy

This video explains why it may be more advantageous to borrow against your banking whole life insurance policy rather than take a withdrawal. It also explores the distinction between traditional debt and a collateralized policy loan.

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The question comes up constantly: do I have to borrow from my own bank, or can I just make a withdrawal? Straight answer — no, you don’t have to borrow, and yes, you can withdraw. But there are clear advantages to using the borrowing feature. The cleanest way to see them is to walk the concept first, then look at what an actual policy’s numbers do.

What Debt Actually Does To Your Balance Sheet

Start with somebody sitting at even — no savings, no debt. To make a purchase, they have to use somebody else’s money, which puts them below the line. That’s debt, and interest accrues on it. To keep it from snowballing out of control and to keep their credit in good standing, they make principal-and-interest payments until they’re back to even.

Having earned that creditworthiness, when they want to make another purchase later in life they can do it again — somebody else’s money, more principal-and-interest payments. And all of that effort buys them one thing: the right to arrive back at zero.

Saving Your Own Money Only Solves Half Of It

The alternative is to save your own money so you don’t have to use anybody else’s. That means starting earlier, because you have to spend time and energy accruing the money before you can make the same purchase. And even though you don’t owe a lender a principal-and-interest payment afterward, you still have to make regular payments back into your own savings account to refill it for the next purchase. I call that P minus I, because most savings accounts aren’t paying much of anything.

So notice where the saver ends up. He’s on the right side of the line the whole time — no lender, no debt — and he still isn’t making any real progress with that block of funds. He fills the bucket, empties it, and fills it again.

Compounding That Never Gets Interrupted

So what’s the alternative? I think we’d both agree the holy grail would be an account that safely compounds interest for you. Compounding is P plus I plus I: you earn interest on your principal, and once a year goes by you earn interest on your principal and interest on the interest your principal already earned. That’s what produces the snowballing, steepening curve over time.

I ask clients whether they’d rather own the early, flat part of that curve or the late, steep part. Everybody wants the far right. There’s no magic bullet that gets you there — it’s just allowing the money to snowball, uninterrupted.

Now add one feature to that account. If you could collaterally borrow against it at any time, for any reason — and then refill your capacity by paying the loan off — there’s really no love lost. You end up further along the curve than where you started, ready to do it again. Run the saver and the borrower on the exact same cash flows and the difference is staggering.

Is It Really Debt If An Asset Is Growing Alongside It?

I know that for some of you, the word borrow makes you see red. You’ve worked very hard to get out of debt, or you’re in the middle of working very hard to get out of debt, and I commend you for that.

But ask the technical question anyway: is it debt if you have a corresponding asset growing right alongside it? These semantics are the single biggest stumbling block I run into, even with my most successful clients. Get past the reflex that borrowing automatically equals bad, and you can put yourself in a materially better financial position.

Why Withdrawing Defeats The Purpose

Back to the original question. If the account is that good, can’t you just withdraw your own money? Sure. But it defeats the purpose, because the moment you make the purchase and drain the account, you kill the compounding. It’s gone. It isn’t happening anymore.

It doesn’t matter how good the account is or what kind of interest it earns, because there’s nothing left in it to earn on. And by the time you fill it back up, you’re behind where you would have been had you never interrupted the compounding in the first place. The only way around that is to have a feature written into the contract that lets you collaterally borrow against your compounding asset at any time, for any reason.

Running The Numbers On A Real Banking Policy

So here’s the mathematical example — an actual policy designed for banking from a very reputable company. These are non-guaranteed values, which means the illustration assumes the company keeps paying dividends every year at the current dividend scale. That scale was historically low at the time this was modeled, given the low interest-rate environment then in place. There’s no guarantee a dividend continues, though this particular company has paid one every year since the mid-1800s.

The insured is a 43-year-old at the second-best health rating, funding premiums for only seven years. You could pay longer, and you probably should, but you don’t have to. The minimum premium due on this policy is under $6,000. But to overpay that minimum and stuff in the full $25,000 a year — which is what you want if you’re building as much cash value as possible — the IRS requires roughly $925,000 of death benefit. That’s close to the least death benefit the tax code will let you carry against $25,000 a year for seven years.

After the premiums stop, the total net outlay column goes negative: a $140,000 policy loan, then seven $20,000 payments back. Then it runs again — a second $140,000 loan and seven more $20,000 payments. The last payment of the first cycle lands on the second loan, so the software nets the two out automatically.

That’s the compounding line expressed in numbers: $175,000 of premium going in at $25,000 a year for seven years, a $140,000 loan taken and paid back to principal, taken again and paid back again, and the full $175,000 compounding the entire time, regardless of what the loans were spent on.

Policy Loans vs. A Savings Account, Side By Side

Now compare that against doing exactly the same thing out of a cash account. We have a separate calculator that plugs in $175,000, takes $140,000 out, puts it back, takes it out again and puts it back — the same cash flows, the same purchases.

The benchmark is year 23, at age 66. On the policy side, net cash value at the end of that year is $350,000 rounded down, and net death benefit at the beginning of the year is $877,000.

On the cash side I was deliberately generous. I gave that savings account a 5% rate of return, and assumed the saver pays 35% between state and federal tax — some of you pay more than that, some less. I also gave the saver term insurance, because an honest comparison has to include a death benefit: $925,000 of 20-year term actually ran a little over a thousand dollars a year with the cheapest company out there, and I rounded that down too.

Two cycles of $140,000 out and back, and at year 23 the saver has just under $250,000 in cash — and zero death benefit, because the 20-year term has already lapsed in spite of having been paid for the entire time. The policy, by contrast, has $350,000 of cash value plus $877,000 of death benefit that endures. It will grow or shrink depending on how you use the policy, but it doesn’t lapse after 20 years.

Some of you are thinking: Hutch, I’m in a state with no income tax, I’m a fairly modest earner paying 25%, and I don’t have kids so I don’t need to pay for term. Fine — dial all of that in, and the cash account is still smaller than the policy’s cash value. The reason is always the same. On one side the asset compounds no matter what, policy loans and all. On the other side you’re filling the bucket, taking money out, filling it, taking money out.

What Happens When You Raise The Savings Rate

The spreadsheet view of that savings account makes it obvious. Put in $25,000 a year at 5% and the first year throws off $1,250 of growth, of which about $312 goes to tax. As the account fills, the annual growth builds to some real critical mass — roughly $10,000 of compounding by the seventh year.

Then year eight arrives and you pull out $140,000 of it. It crushes the compounding. You fill the bucket back up, the annual growth climbs back to about $10,000, and then you take another $140,000 and crush it again. That is the entire reason the policy side is more powerful: it compounds the full balance without ever getting crushed.

Drop the savings rate to something closer to what people were actually earning, hold that lower tax rate and skip the term, and the policy still creates roughly $155,000 and change out of thin air — purely from repositioning the money and funneling purchases through it in a more efficient way.

Put the higher tax rate and the term cost back, since a lot of my clients are higher-income earners with real responsibilities, and then walk the savings rate up. 5% is behind. 6% is still behind. 7%, still behind. 8%, still behind. Even if rates rise on the savings side and, for the sake of argument, nothing improves on the policy side, the policy is ahead. And in fact, if fixed interest rates did rise, you’d likely see some increases in the policy too.

Use a more realistic figure — the 23-year average on savings account rates, call it two and a half percent — and the saver is left with $192,000 of cash after 23 years against $350,000 of cash value in the policy. That’s over 80% more, with no improvement assumed on the policy side at all.

Which One Would You Rather Have?

So that’s the question I put to clients. Do you want to keep letting banks and other financial companies reap the benefit of your savings, throwing you pennies in between your purchases? Or do you want to harness the power of compounding continually, in an account contractually guaranteed to grow, with contractual access at any time, for any reason?

And I know we downplay the death benefit around here, but it’s worth saying plainly: your savings account would basically double or more overnight in the form of a death benefit, arriving in your family’s life at the moment they need it most. No other institution offers that. It just doesn’t exist anywhere else.

For the vast majority of people, what you’ve seen here is an absolute no-brainer and hugely advantageous to their wealth-building efforts. But run it against your own numbers before you decide.

John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA

Founder of BankingTruths.com · 19-year practitioner · 14 family banking policies across 3 companies · independent broker

John “Hutch” Hutchinson has no affiliation or association with The Infinite Banking Concept®, The Infinite Banking Institute, or Nelson Nash, nor his book Becoming Your Own Banker – Unlocking the Infinite Banking Concept; nor with Bank on Yourself, Pamela Yellen, or her book The Bank on Yourself Revolution. “The Infinite Banking Concept®” is a registered trademark of Infinite Banking Concepts Inc. “Bank On Yourself®” is a registered trademark of Hayward-Yellen 100 Limited Partnership.