How Policy Loans Work

Policy loans are the engine of the Infinite Banking Concept. They’re also the most misunderstood part. If you’ve ever wondered, “Why would I pay interest to borrow my own money?” — this article is for you.

The short answer: you’re not borrowing your own money. And that distinction changes everything.

What a Policy Loan Actually Is

When you take a policy loan from a dividend-paying whole life insurance policy, you are not withdrawing money from your cash value. You are not dipping into your savings. You are borrowing money from the life insurance company, using your cash value as collateral.

Think of it like a home equity line of credit (HELOC) — but radically better. With a HELOC, you borrow against the equity in your house. With a policy loan, you borrow against the equity (cash value) in your life insurance policy. In both cases, the underlying asset stays in place. You’re leveraging, not liquidating.

Here’s where it gets powerful: because your cash value serves only as collateral — not as the source of the loan — your money never actually leaves the policy. It stays right where it is, continuing to earn interest and dividends as if you had never borrowed at all.

This is the concept Nash called uninterrupted compounding, and it is the single most important mechanical feature of the Infinite Banking Concept.

Uninterrupted Compounding: The Key Insight

Let’s say you have $100,000 in cash value in your whole life policy, and you take a $50,000 policy loan. Here’s what happens:

• The insurance company lends you $50,000 from their general fund — not from your policy.
• Your $100,000 in cash value remains fully intact inside the policy.
• That $100,000 continues to earn guaranteed interest and participate in dividends — the same as if you had never taken a loan.
• Meanwhile, you have $50,000 of the insurance company’s money to use however you choose.

This is fundamentally different from any other financial vehicle. If you pull money from a savings account, a CD, a brokerage account, or a 401(k), the money you withdraw stops earning the moment it leaves. You’ve interrupted the compounding.

With a policy loan, your capital keeps working in two places simultaneously — inside the policy earning dividends and interest, and outside the policy deployed in your life, your business, or your next opportunity. Nelson Nash called this the velocity of money — keeping your capital in motion and productive on multiple fronts.

No Credit Check, No Application, No Fixed Repayment Schedule

One of the most remarkable features of a policy loan is what it doesn’t require:

• No credit check. Your credit score is irrelevant. The insurance company doesn’t care because the loan is 100% collateralized by your cash value.
• No application process. You don’t fill out paperwork, submit pay stubs, or wait for approval. You request the loan and the company sends the funds — often within days, sometimes within 48 hours.
• No fixed repayment schedule. There is no monthly payment due. There is no 5-year or 30-year term. You decide when to pay it back, how much to pay, and how often. You can skip payments entirely if you choose.
• No risk of being “called.” Unlike a bank loan or a line of credit, the insurance company cannot demand early repayment. The loan exists on your terms.

As Nelson Nash put it: the policy owner outranks every other potential borrower of the insurance company’s funds. You have a contractual right to borrow up to 100% of your cash value, and the company must honor that right. This is written into the unilateral contract — meaning the insurance company cannot change the terms after the policy is issued.

How the Interest Works

“But wait — I still have to pay interest on the loan. Why?”

Yes, the insurance company charges interest on the loan. This is because you are borrowing their money, not yours. Think of it this way: if you don’t pay a cost of capital on the money you use, you’re ignoring a fundamental economic reality. Money has a price. Even your own money has an opportunity cost.

Here’s why policy loan interest is different from bank interest:

With a bank loan:

• You pay interest to the bank.
• The bank keeps the profit.
• You have no ownership stake in the bank.
• The bank dictates terms, timeline, and consequences for late payment.

With a policy loan:

• You pay interest to the insurance company.
• As a policyholder of a mutual company, you are a partial owner.
• The company’s profits are returned to you as dividends.
• You control the repayment schedule entirely.

The interest you pay is not lost — it circulates through a system you own. Over time, the dividends you receive reflect the company’s overall profitability, which includes the interest paid on policy loans. You’re not paying interest to an outside institution. You’re paying interest to your own company.

Nash went further: he recommended paying yourself back at the market rate of interest — not just the rate the insurance company charges. If the company charges 5% and the market rate is 8%, you pay yourself the full 8%. The difference — that 3% spread — goes directly back into your policy as additional capital. This is how you practice honest banking and grow your system with every transaction.

The Volume of Business Concept

Here’s where the magic of IBC reveals itself over time. Every loan you take and repay is a transaction in your personal banking system. Each transaction adds volume. Each repayment recaptures interest that would have otherwise gone to a bank, a credit card company, or an auto lender.

Nash used the grocery store analogy: a grocery store doesn’t get rich on one can of peas. It gets rich on the turnover — the constant flow of goods being bought, sold, and restocked. Your policy works the same way. The more transactions you run through your system — car purchases, equipment financing, real estate, business expenses, even vacations — the more volume you create, and the more capital accumulates.

Over a lifetime, the compounding effect of this volume is staggering. You’re not just saving money in a policy. You’re running a banking operation where every transaction strengthens the system.

What Happens If You Don’t Repay?

This is an important question. If you never repay the loan, the insurance company will simply deduct the outstanding loan balance (plus accrued interest) from your death benefit when you pass away. Your beneficiaries receive the net amount.

Your cash value continues to grow regardless. The death benefit continues to compound. The loan is always 100% collateralized, so the insurance company is never at risk. This is why they don’t require credit checks or repayment schedules — there is zero risk to them.

However — and Nash was emphatic about this — you should repay your loans. Not because the insurance company demands it, but because you are building a banking system. If you steal from your own grocery store, the business dies. If you fail to practice honest banking — repaying loans with interest, capitalizing your system, thinking long-range — you undermine the very engine that creates your financial freedom.

A Quick Summary

Feature	Bank Loan	Policy Loan
Credit check required	Yes	No
Application process	Yes	Minimal to none
Fixed repayment schedule	Yes	No — you decide
Can be called early	Yes	No
Your capital keeps earning	No — money is spent	Yes — uninterrupted compounding
Who profits from the interest	The bank	You (via mutual company dividends)

Getting Started

Policy loans aren’t complicated. They’re just different from what most people are used to. The shift is from thinking about borrowing as a transaction with an outside institution to thinking about it as a function within a system you own and control.

The best place to deepen your understanding is Nelson Nash’s Becoming Your Own Banker. Chapter by chapter, he builds the case for why this system works — and why the policy loan is the mechanism that makes it all possible.

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This article is for educational purposes only. IBC Academy does not sell financial products or provide financial advice.