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If you’ve been learning about participating whole life insurance, you might be wondering how policy loans work when it comes to major purchases like buying a home. These are questions that many people ask when they’re considering how whole life insurance fits into their broader financial strategy.
Let’s walk through some common questions about policy loans, death benefits, and how this all works in real life.
This is an important question to understand about whole life insurance policy loans.
When you take a policy loan against the cash value of your whole life insurance policy, the death benefit (aka face amount) of $250,000 does not permanently reduce just because you borrowed money. The death benefit remains in place. What changes is the net amount your beneficiaries would receive after the outstanding loan is settled.
Here’s how it works. The loan is secured by your cash value, and you’re borrowing from the insurance company using your policy as collateral. The cash value continues growing, earning guaranteed growth plus any dividends the insurance company declares. You do pay interest on the borrowed amount, which can range from around 4% to 8% depending on the policy and insurance company.
Policy loan repayment is optional during your lifetime as long as the interest is covered. There’s no fixed repayment schedule like a bank loan requires. If you repay the loan with principal and interest, the full $250,000 death benefit remains intact for your beneficiaries. If you never repay the loan, upon your death the insurance company deducts the outstanding loan balance plus any accrued interest from the death benefit before paying your beneficiaries.
Suppose an extreme example where your policy has built up enough cash value that you can borrow $200,000 to help buy a home. Years later, when you pass away, if that $200,000 loan is still outstanding and has accumulated $50,000 in unpaid interest, the total owed might be $250,000. Your beneficiaries would receive $250,000 (the original face amount) minus $250,000, which equals zero in this extreme example.
Remember, with participating whole life policies from mutual companies, dividends are being paid and can be used to buy paid-up additions that increase the total death benefit over time. So even with an outstanding loan, the death benefit often grows well beyond the original face amount.
The important thing to understand is that your death benefit doesn’t automatically drop to zero or to the remaining cash value just because you took a policy loan. The death benefit is reduced by what you owe at the time of death.
Absolutely. This is exactly what many people use participating whole life insurance for. At McFie Insurance, we help people understand how to structure their policies to maximize cash value growth early so they can use policy loans for major purchases like homes, cars, or business investments.
The strategy involves designing a high cash value participating whole life policy, usually with Paid-Up Additions riders, from a strong mutual company. You pay premiums that build substantial cash value relatively quickly. After a few years, when cash value is substantial, you can take policy loans against it to make a down payment on a home, pay off an existing mortgage, or in some cases finance a large portion of the home purchase.
The real benefit comes from several factors working together. First, you don’t need bank qualification once the policy is funded. You don’t need income verification, credit score checks, or debt-to-income ratios. Second, the cash value keeps earning dividends and guaranteed interest even while loaned against. Third, policy loans are tax-free. And fourth, there’s no fixed repayment schedule, except for the interest. You have complete flexibility about when and how much you repay.
In fact, Jesse and Alyssa McFie purchased their first home this way using the Infinite Banking Concept and their participating whole life insurance policies. Here’s the story:
At McFie Insurance, we focus on two questions with every strategy: Is it affordable? Is it comfortable? We know if it isn’t affordable, you can’t do it, and if it’s not comfortable, you won’t do it. At the same time you don’t want to only “dip your toes in the water” because results are proportional to the amount you fund your premiums.
Using whole life insurance to finance a home purchase makes sense when it fits within your overall financial picture and gives you the control and flexibility you want.
You can make one very large single payment into a participating whole life policy, and this is actually one of the best ways to build immediate cash value. But there are limits you want to understand.
Whole life insurance is governed by tax code rules, specifically what’s called the 7-pay test or MEC test. To keep your policy tax-advantaged (meaning cash value grows tax-deferred and loans remain tax-free), the policy must not become a MEC. The IRS looks at the relationship between premiums, cash value and death benefit over a 7 year sliding window to determine whether a policy is considered a modified endowment contract or not.
If you put too much money in year one, the policy instantly becomes a MEC. Once this happens, part of nearly every policy loan or withdrawal will get taxed as ordinary income, and you lose some of the big tax advantages that whole life insurance is known for providing.
Sometimes it still makes sense to make a substantial single premium payment. The details depends on your age and health. For someone who is 62 years old in good health, for example, a $250,000 single payment into a properly designed policy would create an immediate cash value of around $237,000. You could borrow against most of that amount within 60 to 90 days.
This policy would provide an initial death benefit of approximately $410,000, which can continue growing with dividends over time. Even after borrowing for a home purchase, your beneficiaries would still receive a substantial death benefit.
At McFie Insurance, we usually design policies to maximize early cash value while staying within the tax code limits. When the situation makes sense, we can also design a single premium policy. We understand the technical aspects of policy design to help you achieve the best results.
At age 62, the infinite banking strategy can still work extremely well when you’re in good health. You’re also past the age where you’d face early withdrawal penalties on other retirement accounts, so this strategy can complement your overall retirement planning by allowing you to consider shifting assets from retirement accounts to life insurance cash values for long-term balance and protection against sequence-of-returns risk in invested accounts.
Yes, it is possible and allowed to never repay a policy loan during your lifetime, but most of the time you will want to do so. If you take a policy loan that you do not wish to repay, it may be better to convert it to a withdrawal.
With policy loans from mutual companies, the loan is non-recourse. The policy itself is the only collateral. The insurance company cannot come after your home, your bank accounts, or any other assets. There’s no foreclosure process and no collection activity while you’re alive.
The worst that could happen if you don’t pay the loan interest is that a policy could lapse and there may be a tax liability if the cash value has grown to be greater than all premiums paid. There is usually no good reason to let a policy loan go this far before taking some other action to reduce the loan and preserve the remaining value of a policy.
At your death, the insurance company deducts an outstanding loan balance plus any accrued unpaid interest from the death benefit. Your beneficiaries receive whatever is left.
The bigger issue with this strategy at age 62 is something called sequence-of-returns risk. Historical studies show that if you’re withdrawing from an investment portfolio in retirement, a stock market crash in the first 5 to 10 years can devastate your ability to make your money last. The 2000 to 2002 downturn, the 2007 to 2009 financial crisis, and even the 2022 decline all demonstrate this risk.
If the market drops 30% or more right after you retire and you need to keep selling shares to make house payments, you’re locking in losses and destroying your principal very quickly. Once the principal is gone, there’s often no good way to recover it in your remaining lifetime.
Safe withdrawal rate studies suggest that at age 62, you should only withdraw about 3.5% to 4% per year (sometimes less) if you need money to last 30 years in retirement. On $250,000, that’s only $8,750 – 10,000 per year before taxes.
This is one reason why people who understand risk use participating whole life insurance for the safe, predictable portion of their financial plan. This can help to ensure coverage on long-term commitments like mortgage payments especially at this time of life. They can keep other investments for growth, without putting their housing security at risk with market volatility.
At McFie Insurance, we help people understand their options so they can make informed choices that are comfortable, affordable, and give them financial peace of mind.
If you’re interested in using participating whole life insurance for a home purchase or other major financial goals, the first step is understanding whether this strategy fits your specific situation.
At McFie Insurance, we offer strategy sessions where we answer your questions and show you how properly designed participating whole life insurance can help you keep more of the money you make, grow your wealth, and have financial peace of mind. After a strategy session, you’ll know whether whole life insurance is right for you.
We don’t charge for strategy sessions, and we don’t require you to purchase insurance from us afterward. Most people who meet with us can benefit from whole life insurance, and we get paid for selling life insurance. But some people can’t benefit from whole life insurance, and selling a policy to someone who can’t benefit would be no help at all.
Our mission is to make sure you know your options so that you can make an informed choice that is comfortable, affordable, and profitable for you.
The policy design matters. To create high cash values early, you need to minimize the base insurance in the policy and maximize the paid-up additions rider. This isn’t difficult, but it requires specific knowledge about how to structure policies correctly. And, many agents don’t design policies this way because it reduces their commission. At McFie Insurance, we’re willing to design policies that benefit our clients, even when it means lower commissions for us.
We also help you understand the different mutual companies and their features. Companies like MassMutual, Penn Mutual, Guardian, Ameritas, OneAmerica, Security Mutual and New York Life all offer participating whole life insurance, but they have different dividend scales, and policy features. Knowing which company and which specific policy design works well for your age, health, and financial goals can make a significant difference in your results.
If you’re 62 years old with $250,000 to put into a policy, or if you’re any age looking to use whole life insurance as part of your financial strategy, we can run illustrations that show exactly what your cash value, death benefit, and borrowing capacity would look like over time.
This transparency helps you make decisions based on real numbers, not just marketing promises. You can schedule a strategy session with us by calling 317-912-1000 or visiting our website at mcfieinsurance.com. We’ll take the time to understand your situation, answer your questions, and show you what’s possible with properly designed participating whole life insurance.
Using participating whole life insurance policy loans to finance a home purchase is a proven strategy that has worked for thousands of people. It’s not magic, and it’s not a get-rich-quick scheme. It’s a disciplined approach to building accessible cash value that you control, maintaining tax advantages, and creating a financial legacy for your family.
The strategy works best when you understand both the benefits and the commitments involved. You’re building a long-term financial tool that provides death benefit protection, tax-advantaged growth, liquidity through policy loans, and flexibility in how you manage your money.
At McFie Insurance, we’ve helped many clients design policies for this purpose. We’ve seen people pay off 30-year mortgages faster using this approach. We’ve seen people use policy loans for down payments as well as buying homes without going through bank qualification processes. We’ve seen families create substantial wealth while maintaining control over their money.
The key is proper policy design, understanding how policy loans work, and having realistic expectations about policy growth, and long-term outcomes. That’s where working with a team who specializes in these policies makes all the difference.
Tomas P. McFie DC PhD
Tom McFie is the founder of McFie Insurance and co-host of the WealthTalks podcast which helps people keep more of the money they make, so they can have financial peace of mind. He has reviewed 1000s of whole life insurance policies and has practiced the Infinite Banking Concept for nearly 20 years, making him one of the foremost experts on achieving financial peace of mind. His latest book, A Biblical Guide to Personal Finance, can be purchased here.
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