Life insurance policy loans represent one of the most versatile and accessible financial tools available to policyholders today. These loans allow you to borrow against your permanent life insurance policy’s cash value component with remarkable flexibility and favorable loan interest rates. Understanding policy loans is essential for optimal financial planning – they remain tax-free in Canada when structured properly, require no mandatory repayment schedule during your lifetime, and typically allow borrowing up to 90% of your cash value. With interest rates averaging 6.25% in 2025, policy loans operate under contractual terms established at policy issuance that provide certainty and stability compared to traditional loans.
If left unpaid, the outstanding loan balance is simply deducted from the death benefit when the policy pays out. Policy lapses can occur if the outstanding loan plus accumulated interest exceeds the cash value. What distinguishes life insurance loans from conventional financing options like credit cards or equity loans is their accessibility—funds become available within 1-5 business days with no blood tests, credit checks or approval processes required. Policyholders can take multiple policy loans simultaneously as a source of funds, though they should understand that these loans affect dividend calculations and investment growth. Perhaps most compelling is that policy loans offer complete freedom of use, making them ideal for everything from business investments to real estate purchases, educational expenses, or unexpected expenses.
A policy loan in the Infinite Banking Concept is a type of loan taken against the cash value of a permanent life insurance policy. The loan is secured by the policy’s cash value but the money actually comes from the insurance company’s general fund. This financial strategy was popularized by R. Nelson Nash in his book “Becoming Your Own Banker” published in 2000, which has sold over 500,000 copies worldwide. As noted by Nelson Nash, the inventor of the Infinite Banking Concept who passed away in 2019 at age 88, this strategy enables individuals to take control of their financial lives by reclaiming the banking function from outsiders.
Unlike a personal loan from a financial institution, a policy-based loan doesn’t require a repayment schedule, making it a flexible option for policyholders seeking access to funds. The policy owner maintains control over repayment terms while the cash value component continues to potentially grow even with an outstanding loan, depending on the type of policy and market conditions.
Policy loans in Canada are generally tax-free as long as the policy remains in force and the loan doesn’t exceed the adjusted cost basis. The tax-free status of these funds is maintained because the loan is not considered taxable income but rather an advance against the death benefit according to the Income Tax Act Section 148(9). Unlike employment income or income from office which faces ordinary income taxation, properly structured policy loans avoid adverse tax consequences.
As per Mark Seed, who runs My Own Advisor, a personal finance and investing blog, policy loans in Canada need to be carefully structured with proper understanding of how pre-existing medical conditions might affect life insurance coverage. A tax professional or tax advisor should be consulted about potential tax implications, especially when dealing with substantial loan amounts that could impact your overall tax situation.
You do not have to repay a policy loan during your lifetime. The loan is completely voluntary to repay as there are no mandatory periodic payments or minimum payment requirements. Without regular payments or payments of principal, the loan interest accumulation will continue to grow over time.
Statistics show that approximately 65% of policyholders choose to repay their loans to restore full death benefit and cash values. Annual payments or monthly interest payments can help manage the outstanding loan balance. Based on insurance professionals, if the loan isn’t paid before death, the insurance company will reduce the face amount of the insurance policy by what is still owed when the death benefit is paid out.
You can borrow up to 90% of the cash surrender value in your life insurance policy. Sufficient cash must be available in your policy to support your borrowing potential. The available loan principal grows as your cash value increases over time, with the average policy reaching substantial borrowing capacity by year 7-10.
Data from the Canadian Life and Health Insurance Association (CLHIA) indicates that the average policy loan in 2024 was $27,500, representing approximately 45% of available cash values. The minimum cash required to obtain a loan varies by insurance companies, with most requiring at least $5,000 in accumulated cash value before allowing access to cash through policy loans. As observed by Todd Langford, CEO and developer of Truth Concepts financial calculators, policy loans provide greater benefits the longer you live because they allow for maximizing your wealth over time while still using it today.
The interest rate on a policy loan typically ranges between 5% and 8% depending on the insurance company and policy type. For a universal life insurance policy, the variable loan rates might be tied to capital markets or investment climate, while whole life policies often feature a more stable fixed rate. Most major carriers updated their policy loan rates in January 2025, with the industry average currently at 6.25% according to recent data from the Canadian Insurance Services Regulatory Organizations (CISRO).
Unlike traditional loans where market conditions and your risk profile might dramatically affect your borrowing costs, policy loans provide consistent, predictable loan interest rates that are often competitive with other types of loans such as equity loans or collateral loans. In the view of Todd Langford, a pioneer in financial truth-telling through his Truth Concepts software, policy loans operate with mathematical precision that offers certainty to financial advisors and their clients in various financial situations.
The insurance company sets the terms of the policy loan through the contractual language in your policy document. The loan terms are legally established at policy issuance and cannot be changed unilaterally by the insurer during the life of the contract. This security policy provision protects the policyholder from sudden changes to loan options or policy fees.
A 2024 study by the Canadian Council of Insurance Regulators (CCIR) found that 94% of whole life policies have guaranteed loan provisions that cannot be modified, providing a minimum guarantee regardless of changing macroeconomic policy framework. As reported by economist Robert P. Murphy, this is why policy loans offer such flexibility – the insurance company is prepared to advance policy loans with the underlying cash surrender value serving as the collateral security.
If you don’t repay the loan, the outstanding loan balance plus accumulated interest will be deducted from the death benefit when the policy pays out, resulting in a reduced death benefit for your beneficiaries. The loan balance continues accruing interest at the stated policy rate, with compound interest increasing the total debt by approximately 6-8% annually. Absent repayment, your policy values continue to be diminished over a period of time.
For universal life insurance policies with an investment component, unpaid loans can potentially impact the investment gains and growth potential of your policy. According to Rebecca Walser, a tax attorney, Certified Financial Planner, and author of “Wealth Unbroken,” proper understanding of financial strategies includes knowing the consequences of policy loans on your overall financial picture, including how unpaid loans might put your policy at risk of lapsing if sufficient money isn’t maintained in the cash value.
You can take multiple loans from your policy as long as the total borrowed amount doesn’t exceed your available life insurance cash value. This flexibility allows policyholders to address major expenses or capitalize on investment opportunities without surrendering their policies. Statistics from Canada Life show that 42% of policyholders who leverage their policies take an average of 3.7 distinct loans throughout the policy lifetime.
Each loan may have different terms depending on when it’s taken, reflecting the current loan rates offered by your insurance company. Some insurance company representatives might recommend partial surrenders instead of multiple loans in certain situations, though this approach has different tax implications and potential surrender fees to consider. In the words of Caleb Guilliams, founder and CEO of BetterWealth, multiple policy loans can create a cash flow system through properly structured Infinite Banking policies utilizing correctly designed PUA and term riders.
Policy loans do affect dividends and policy performance through direct reduction of the dividend-earning capacity of borrowed funds. When you take loan money from your life insurance, most insurance companies calculate dividends on the net cash value (total cash value minus loans outstanding) resulting in approximately 30-40% lower dividend earnings on borrowed portions.
The investment component of permanent policies continues to function, but the loan spans reduce the base on which your investment increases can occur. For policies with a variety of investment accounts or investment mixes, the potential impact varies based on the blend of risk in your policy’s investments. As stated by Tom Hegna, retirement expert and economist, policy loans create an opportunity cost in dividend earnings that must be carefully weighed against the strategic use of borrowed funds for achieving your financial goals with funds.
You can access a policy loan within 1-5 business days depending on your insurance company’s processing procedures. When unexpected expenses arise or you need extra cash quickly, policy loans provide much faster access to funds than many traditional loans. Many major insurers now offer digital loan applications with same-day approval and electronic fund transfers within 24 hours.
Data from Sun Life Financial shows that 78% of policy loan requests in 2024 were fulfilled within 48 hours, making them a valuable feature for those seeking quick cash solutions. For those seeking even faster options, some companies now offer instant coverage through their insurance offerings, though term life insurance policies generally don’t build cash value for loans. As mentioned by L. Carlos Lara, business consultant and co-author of “The Case for IBC,” policy loans are obtained with a simple request to the insurance company and the money is contractually guaranteed by the financial strength of the insurance company.
There are no credit checks or approvals required for policy loans since you are borrowing against your own asset. Unlike relocation loans, purchase loans, or forgivable loan arrangements that might require extensive documentation and additional collateral, policy loans simply require you to complete a request form. The insurance company does not evaluate creditworthiness, income, or employment status when processing loan requests.
Industry statistics indicate that 100% of policy loan applications from in-force policies with available cash value are approved, compared to just 57% of traditional bank loans. This accessibility makes policy loans particularly attractive for individuals with limited access to conventional debt funding options. In accordance with Robert P. Murphy, economist and co-creator of the IBC Practitioner’s Program, because the insurance companies themselves guarantee the collateral on policy loans, they don’t care about the borrower’s credit score, annual income, purpose of the loan, etc.
Policy loans can be used for anything without restriction or explanation to the insurance company. The funds have no designated purpose requirements unlike specific-use loans such as mortgages or auto loans. This freedom allows policyholders to address various financial situations from paying medical bills to funding college tuition or handling relocation expenses.
A 2024 survey by the Financial Advisors Association of Canada (Advocis) found that policy loans were most commonly used for business investments (37%), real estate purchases (29%), educational expenses (18%), and unexpected expenses (16%). Unlike loans tied to the stock market or home equity that might restrict usage, policy loans provide complete flexibility. As stated by financial experts, policy loans can be used for virtually anything, whether it be buying real estate, financing business expenses, buying a car, funding a vacation or setting up a family banking system with your common-law partner or insurance partners.
When properly structured, policy loans generally don’t create taxable income, unlike distributions from retirement accounts that might face income taxes. However, if a policy lapses or is surrendered with an outstanding loan that exceeds the policy’s adjusted cost basis, the excess amount could trigger a taxable event. Understanding these potential tax implications requires consultation with a tax professional.
For those using policy loans to generate retirement income, proper planning can help ensure that loans remain tax-free cash while maximizing the benefit payout. Unlike a taxable benefit from an employer that might appear on your T4 slip, policy loans remain outside the purview of ordinary income taxation when managed correctly. White papers from reputable publishers consistently highlight this aspect as one of the primary advantages of incorporating policy loans into a comprehensive financial strategy.
When compared to traditional loans like personal loans, home equity loans, or credit cards, policy loans offer several distinct advantages. Policy loans typically feature more competitive interest rates than credit cards, require no credit checks unlike personal loans, and don’t place your home at risk like equity loans. The flexibility in repayment options—with no mandatory monthly insurance costs or payment for salary to loan officers—makes them particularly attractive for uncertain financial situations.
Unlike term life insurance policy options which provide death benefit protection without cash accumulation, permanent policies with cash value provide this valuable borrowing feature. Some policy types even maintain tax-free cash value growth despite outstanding loans, a feature unavailable with most other loan options in the market. For those seeking instant term life coverage for protection with no cash value component, traditional term insurance remains the preferred choice.
Policy loans respond differently to various financial conditions compared to other types of loans. During economic downturns when traditional loans might become scarce, the availability of policy loans remains unaffected as long as your policy maintains sufficient cash value. This makes them a reliable source of emergency funds during challenging market conditions or personal financial crises.
For policyholders considering premium payments through policy loans during temporary financial hardship, most life insurance companies offer accommodating terms. However, long-term reliance on policy loans to fund premium payments can create a debt sustainability challenge if not carefully managed. Insurance professionals often recommend maintaining a strategic approach to loan accumulation and repayment that aligns with your long-term goals and debt funding capacity.
For more information about policy loans or to receive a free, no-obligation quote from our unbiased content creators who understand the importance of this valuable feature in your financial planning, contact the experts at IBC Financial team today. Let us help you evaluate whether policy loans align with your unique financial goals and show you how properly structured the infinite banking concept. Using life insurance policies that provide both protection and financial flexibility for you and your loved ones.
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