In my last post I talked about how policy loans are taken from the insurance company and are collateralized by your policy’s cash value.
Sometimes clients ask me why they have to pay interest when they are borrowing “their” money but as we have established we are not actually borrowing our own money. The health of the insurance company relies on its ability to receive a fair rate of return on its investments. When you take a loan the insurance company has now lost the ability to invest that money even though they continue to pay you on the full value of your policy and your policy continues to grow as guaranteed as if there was no loan at all. The interest rate you repay ensures the insurance company stays healthy which ultimately benefits you as a policyowner.
The interest the insurance company charges will continue to build year by year if it is not repaid. Yes, your policy will continue to grow and serve to offset some of that interest, however, over time, loan interest can overtake the policy if you have a very large outstanding loan. If this happens your policy can be put into jeopardy. However, if you are making proper repayments to your policy this will never become an issue.