Policy Loan
Last updated: March 2026
Definition
Definition
A policy loan does not reduce your cash value — the full cash value continues earning dividends and guaranteed growth as if the loan didn't exist. The insurance company lends from their general account, using your cash value as collateral.
A policy loan is a loan from your insurance company that uses your cash value as collateral. Unlike a withdrawal, your cash value stays in the policy and continues earning dividends or interest while the loan is outstanding. You owe the loan balance plus interest to the insurance company, and you can repay on your own schedule — there's no mandatory repayment timeline.
Why It Matters
Policy loans are the core mechanism of whole life banking — whether you call it Infinite Banking, Bank on Yourself, or any other name. They're how you access capital without disrupting the compounding growth inside your policy. Understanding how they work and tracking them correctly is essential for anyone using their whole life policy as a financial tool. An unmonitored policy loan is one of the most common reasons policies get into trouble.
Deep Explanation
Loan interest accrual
When you take a policy loan, you're not actually withdrawing money from your cash value. The insurance company lends you money and places a lien on your cash value as collateral. Your cash value continues to grow — earning guaranteed interest and, for participating whole life policies, dividends.
The loan accrues interest, typically at a fixed rate (often 5-8%). Most policy loans use capitalized interest — unpaid interest is added to the loan balance, and you then owe interest on the interest. A $50,000 loan at 5% becomes $52,500 after one year if no payments are made, then $55,125 after two years.
The key risk metric is your loan-to-value ratio (outstanding loans / cash value). If this ratio approaches 90-95%, your carrier may contact you about lapse risk. If your loan balance exceeds your cash value, the policy can terminate — potentially creating a taxable event.
Policy loans are tax-free as long as the policy remains in force and doesn't become a Modified Endowment Contract (MEC). This tax advantage is a major reason whole life banking strategies use loans rather than withdrawals.
LTV limits
Most carriers cap policy loans at 90–95% of cash value. As LTV approaches this limit, the carrier may require loan restoration to prevent policy lapse. Track your LTV ratio actively to avoid approaching carrier limits.
How Policy Stack Helps
Policy Stack tracks every policy loan with full interest accrual logic — including whether your carrier uses direct recognition or non-direct recognition for dividend crediting on the loaned portion. It monitors your loan-to-value ratio, calculates available borrowing capacity, and provides alerts before your position approaches risk thresholds. The scenario calculators model loan deployment strategies before you commit capital.
Related Terms
Related Guides
Track every policy loan with full interest accrual logic and LTV monitoring.
Methodology & Transparency: This content was created by the Policy Stack team. We are committed to accuracy and fairness in all comparisons. Feature information is verified against public documentation and direct product testing. If you notice an error or have a correction to suggest, let us know.