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Borrowing against life insurance is the piece of this whole strategy that trips up the most people, so let me clear it up. Loans and the interest charged on them are the most confusing part of what I teach, and I get these questions every single week: How many loans can I take? Do I have to pay it back? How does the interest work? Is it even deductible? Here’s the short version, and then I’ll walk you through all of it.
- You’re borrowing the insurance company’s money, not your own — so your cash value keeps growing while you use it.
- It’s not about getting the lowest rate. It’s about control and liquidity.
- You decide how and when to pay a policy loan back, but you still have to be an honest banker.
- Used for a real farm expense with receipts, the interest is a business deduction like any other loan.
Borrowing Against Life Insurance Isn’t Borrowing Your Own Money
One of the biggest objections I hear is, “I’m not going to pay to borrow my own money.” That is not what’s happening in the policy. When you take a loan, you are borrowing the life insurance company’s money. The interest you pay goes to them for the use of their money. It does not go back into your policy.
So what’s growing your policy? Your own cash value stays right where it is, earning uninterrupted compound interest plus a dividend, while you go use the company’s money. I say “uninterrupted” on purpose, because there’s a real difference between interrupted and uninterrupted compound interest. If you pulled your cash out instead of borrowing against it, you’d interrupt that growth — and you can’t just put it back in whenever you want.
Think of it like a CD. You can borrow against a CD and let it keep earning, which is exactly the same math as the Dave Ramsey CD-and-cattle-note debate I’ve talked about before. The difference is that with a CD, the dividend goes to the bank’s shareholders. Inside a mutual life insurance policy, you’re one of the owners — so when the company makes money, you get the dividend. Your cash value is simply the collateral for the loan, with the death benefit behind it, no different than pledging your land to a bank.
I didn’t believe it either at first. I went and got my daughter’s Monopoly money, made one pile for me and one pile for the life insurance company, and started moving money around and borrowing. It worked exactly the way it was supposed to. If you need to touch it and feel it to believe it, go do the same thing.
Policy Loan vs. Bank Loan: Control Beats the Rate
The question I get constantly is, “Why would I borrow from the policy if the bank is cheaper?” And we are so stuck on rates. Honestly, rates don’t matter to me nearly as much as people think, and here’s why.
The rate the bank quotes you isn’t the real rate, because it doesn’t include their fees. I had a guy tell me that by the time they added his fees, his 5% loan was really more like 8%. So run both numbers: take the insurance company’s rate, take the bank’s rate with the fees added in, and then compare.
But even then, it’s not really about the rate — it’s about control. When I borrow against the policy, the loan doesn’t show up on my credit, I don’t hand over a stack of bank statements, and I decide when and how to pay it back. If I own a rental property and I’m renting it to my kid who can’t cover a full bank payment, I can take whatever they can pay and extend the loan as long as I need. And if the bank ever calls a note, I can just pay it off from the policy if they get greedy or difficult.
I had a prospective client paying 12% to a company that does farm loans for high-risk farmers, while he was sitting on cash value at 3.75%. Why on earth would you not borrow from that instead? So no, it is not always about the rate. It’s about having liquid money and staying in control.
Now, don’t hear me say I hate the bank. I don’t. Sometimes leveraging the bank is the smart move — take the cheaper bank loan and leave your policy money free for an opportunity that creates cash flow. I have a client who hates the bank so much she borrowed all her cash value to pay off her house and vehicles. It’s her money and she gets to do what she wants. Just remember the bank’s debt-to-income math ignores your living expenses — no daycare, no diapers, none of it — so you still have to know your own numbers.
How Policy Loan Interest Actually Works
Here’s where it gets a little cumbersome, but don’t let it scare you off a loan — that’s just silliness. It’s simply not like the bank.
First, your interest is figured on your policy year, not the calendar year. Second, interest is always prepaid on a policy loan. The company grabs the interest it needs up front and holds it — it doesn’t take it. So if your policy starts July 1 and you take a $10,000 loan at 5%, they hold $500 to cover that policy year.
Your rate locks in at each renewal for the next 12 months. It can’t move up or down mid-year, and it is not tied to the Fed — it’s based on the Moody’s bond average. This past November, One America’s renewals went to 5.28%, and then it was locked for the year.
What happens if you make payments during the year? The company realizes it held too much interest, so it prorates the unused portion back to your principal — which actually pays your loan down a little faster. But if you pay neither interest nor principal, that interest compounds: your $10,000 loan becomes $10,500, and now you’re paying interest on interest. That’s why, at a bare minimum, pay the interest so it doesn’t compound.
Two more things people get wrong. One, the loan value you see online is not your cancellation value — if you cashed out, you’d get more than the loan value shows. One America doesn’t even display a loan value; MTL and Wafiat do. Two, don’t just guess your payoff. Interest is charged to the day, so I have Tiara call the company for the exact payoff, and they hold it for 10 days for the check to arrive. I once tried to shortcut that myself and came up about $13 short. Now even I call to get the number.
How Many Loans You Can Take
You can take as many loans as you want. If you have $100,000 of cash value and you pull a $60,000 loan and a $40,000 loan, the insurance company sees it as one loan against one pool of money. They do not ask what it’s for. You fill out a short form online, and you typically have your money in three to five days — though some companies are shorthanded right now and taking longer, and the contract technically allows them up to 90 days.
Do you have to pay it back? You decide the terms, but yes, you need to. If you don’t pay it back, you don’t have it there to borrow again. At the very least, make the interest-only payment. There’s one spot where interest-only is genuinely fine: a true line-of-credit operation — feeder calves, a feedlot, hogs, chicken houses — where money is constantly going in and out and repaying each cycle is more hassle than it’s worth. For everything else, be honest about paying it down.
Repaying a Loan for Something That Doesn’t Make Money
Here’s a great question I got: how do I pay back a loan for something that doesn’t produce cash flow, like a truck or a tractor? The answer is simpler than it feels. Pretend the policy is the actual bank. If you were buying that vehicle and couldn’t structure a normal three-, five-, or six-year note and make the payment, then you shouldn’t be borrowing to buy it — even though it’s your money sitting there.
When you can afford it, set your own amortization schedule and stick to it. You can find free schedules online. Bought a piece of equipment? Run a five- or seven-year payback. Bought cows? Five years. Did a house remodel? Pay it over twenty. And on a depreciating asset, pay principal plus interest — don’t leave a truck or cattle sitting on interest-only forever. I did a six-year note on a car exactly once, when I was starting my business and had no choice, and by the time I traded it I barely got what I owed. I don’t recommend it.
One honest gut-check: if you can’t make your premium payment and your loan repayment at the same time, your premium is probably set too high. People get excited, read the book, and want to jump in with a $50,000 premium. That’s great — until you borrow $40,000 and realize you owe the $50,000 premium plus the repayment next year. Keep the premium comfortable so you can actually do both.
Is the Interest Tax-Deductible?
This one has been coming up with accountants a lot lately, and it drives me a little crazy. If you borrowed against your policy for a real farm expense — cattle, fuel, fertilizer, feed, seed, a barn, corrals — and you kept the receipts, that interest is a business expense, no different than interest on a bank loan.
The hang-up is that some accountants think you borrowed your own money, so they say the interest can’t be deducted. But you didn’t borrow your own money — you borrowed the insurance company’s, and that interest is a true cost paid to them. I even had a client whose accountant wouldn’t allow it on a policy loan but happily deducted the interest when that same client borrowed from his dad. It’s a loan either way. And remember, if you ever canceled a policy that had a loan on it, you’d get a 1099 and owe tax on any growth above your basis — so if it’s real enough to be taxed on the way out, the interest is real enough to deduct on the way in.
I’m not an accountant, and I’ll tell you that plainly. I’m telling you what most accountants are doing, and the vast majority allow the deduction with a receipt. Both of my accountants were IRS auditors — one of them for 30 years — and neither sees a problem with it. If yours won’t even research it, you may have the wrong accountant.
The Bottom Line
Borrowing against life insurance isn’t complicated once you stop thinking of it as borrowing your own money. You’re leveraging the insurance company’s dollars while yours keep compounding, you’re trading the bank’s control for your own, and you’re staying disciplined enough to pay yourself back like the honest banker you’re becoming. Run your own numbers, keep your receipts, and pay at least the interest every time.
If you haven’t read the book yet, that’s the place to start — grab Farming Without the Bank (or Life Without the Bank if you’re not farming) at farmingwithoutthebank.com, then get on the calendar so we can build your strategy. That’s how you actually take control of this.
Frequently Asked Questions
What is the difference between a policy loan and a bank loan?
With a bank loan, the quoted rate leaves out the fees — one borrower’s 5% turned into about 8% once they were added — and the bank stays in control: it hits your credit and they can call the note. With a policy loan, you decide when and how to pay it back, it doesn’t show on your credit, and you can pay it off anytime. It’s less about the rate and more about control and liquidity. Sometimes the bank is still the right tool so your policy money stays free for a cash-flowing opportunity.
How does policy loan interest work?
Interest is figured on your policy year, not the calendar year, and it’s prepaid — the company holds the interest up front rather than charging it as you go. Your rate locks at each renewal for 12 months and is based on the Moody’s bond average, not the Fed. If you make payments, the insurer prorates the unused interest back to principal; if you pay nothing, it compounds. On a $10,000 loan at 5%, they’d hold $500 for the year.
How many policy loans can I take?
As many as you want. The insurance company treats everything you’ve borrowed as one loan against one pool of cash value, and they never ask what it’s for. You fill out a short form and usually have the money in three to five days, though the contract allows up to 90.
Do I have to pay back a policy loan?
You set the terms, but yes — if you don’t pay it back, you don’t have it there to borrow again. At a minimum, pay the interest so it doesn’t compound. The one place interest-only makes sense is a true line-of-credit operation like feeders, hogs, or chicken houses, where money is constantly cycling in and out.
Is policy loan interest tax deductible?
If you borrowed for a legitimate farm expense — cattle, fuel, fertilizer, feed, seed, a barn — and you kept the receipts, the interest is a business expense like any other loan. The confusion comes from thinking you borrowed your own money; you didn’t, you borrowed the insurer’s, so the interest is a real cost. Both of my accountants were IRS auditors — one for 30 years — and treat it as deductible. I’m not an accountant, so keep your receipts and work with one who’ll do the research.
How do I pay back a policy loan for something that doesn’t make money, like a truck?
Treat the policy like the bank. If you couldn’t structure a normal three- to five-year note and make that payment, you shouldn’t borrow to buy it in the first place. When you can afford it, set your own amortization schedule and pay principal plus interest on a depreciating asset — don’t leave a truck or cattle sitting on interest-only. And if you can’t cover your premium and the repayment together, your premium was set too high.
