The Case Against
When Borrowing Against Your Life Insurance Doesn’t Make Sense

The flexibility of a policy loan is a genuine advantage. But flexibility without discipline can create serious problems — some of which don’t become visible until years later.

When You Have No Repayment Plan

The most common mistake we see is treating a policy loan like free money. Because there’s no required payment, no one calling to collect, and no due date, it’s easy to borrow and then simply… not think about it. The problem is that interest keeps compounding. Year after year, the loan balance grows. And if the total loan balance ever exceeds the cash surrender value of the policy, the insurer will terminate the policy to protect itself.

That’s when the real damage happens — and we’ll cover exactly why in the next section.

When the Loan Interest Exceeds Your Policy’s Growth Rate

Every policy loan has a cost: the interest charged on the borrowed amount. Whether that cost is tolerable depends on the relationship between the loan rate and the rate at which your cash value grows.

On some policies, particularly certain indexed universal life contracts, there can be a positive spread — the cash value grows faster than the loan costs. On other policies, especially during periods of rising interest rates, the loan may cost more than the policy earns. In that case, every year the loan exists, you’re losing ground.

This is why understanding your specific policy’s loan provisions — and not just the general concept of policy loans — matters so much.

When You’d Be Better Off With a Withdrawal

A loan isn’t the only way to access cash value. You can also take a partial withdrawal (sometimes called a partial surrender). Withdrawals up to your cost basis — the total premiums you’ve paid — generally come out tax-free. For smaller amounts, a withdrawal might be the cleaner option because there’s no interest accruing and no loan balance to manage.

The tradeoff is that withdrawals permanently reduce your cash value and death benefit, while loans leave the cash value intact (it just becomes collateral). Which is better depends on whether you need the death benefit at its current level and whether you plan to repay. There’s a detailed comparison in our guide to cash value withdrawals.

When Someone Is Telling You to Borrow Against One Policy to Buy Another

This one deserves a direct warning. Over the past several years, a marketing strategy has emerged in which agents encourage policyholders to borrow against an existing life insurance policy and use the loan proceeds to purchase a second (or third) life insurance policy — framing it as a way to “use leverage” to scale your cash value.

The math doesn’t hold up. Life insurance has acquisition costs — commissions, policy charges, cost of insurance — that create a drag on the new policy’s early cash value. You are borrowing money, paying interest on that money, and using it to buy an asset that won’t be worth what you paid for it for several years. The primary beneficiary of this strategy is the agent earning a new commission, not the policyholder.

We’ve run the numbers on this concept extensively. In every reasonable scenario, the policyholder ends up with less total cash value than they would have by simply leaving the original policy alone. The only scenario where leveraging life insurance to buy more life insurance shows a theoretical advantage requires assuming maximum index crediting rates over decades — an assumption that has no guarantee of materializing.

The bottom line on leveraged life insurance purchases: If someone is telling you to borrow against your existing policy to buy a new one, ask them to show you the numbers compared to simply not borrowing at all. The comparison is usually unflattering to the strategy they’re selling.

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