Jayson Lowe explains what happens when you pay extra interest on a whole life insurance policy loan. The extra interest functions as additional premium, which raises both the death benefit and cash value. Since policyholders co-own the insurance company, those earnings benefit them directly.
When paying back a loan, if you decide to increase the interest paid back, where does the extra interest go? Does it all go to the insurance company? Does it go back into your system? This is a great question that Nelson actually clarifies in his book, Becoming Your Own Banker. Capital has a cost. So when you request a policy loan from the life insurance company, that loan begins accruing simple interest. If you repaid the principal balance of the loan proceeds plus the simple interest that the insurance company calls for, that's the cost of capital. That money goes back into life insurance company. It's a direct contributor to the net earnings of the company. As the policy owner, you co-own that company. And so you want positive contribution to net earnings. The extra interest is not really extra interest, it's additional premium. And that additional premium is either paid in the form of base premium, paid-up additions, or a combination of both. And when you pay that premium, well, we know what happens. The death benefit increases. And when the death benefit increases, the cash value is contractually guaranteed to rise to match it.
