Why I Pay Back a Policy Loan Weekly: The Banker and the Investor Are Two Different Jobs

Nelson Nash wrote Becoming Your Own Banker. He said everyone is in two businesses: the one where you make your living, and the banking business. Of the two, he said, banking is the more important.

I took that literally when I borrowed $10,000 from my cash value life insurance policy and put it into an investment that pays a distribution every week. The plan was to send each week's distribution to the loan. A viewer asked why I'd bother paying back weekly. The answer is that I'm playing two roles with the same dollars.

The policy loan costs 5% interest. As the banker, I loaned money to myself the investor at 5%. A good banker collects that interest in a timely way, whatever the borrower does with the money. So if the investment drops or the distributions shrink, the banking business still gets paid. It would be a bad bank that said, well, the borrower is having a rough month, we'll skip payments.

That puts a rule on the investor side of me. Whatever I buy has to be able to pay the loan back, or my outside income has to cover the payments in the worst case. The loan comes due in my mind even though the carrier doesn't send a bill. Interest on an unpaid loan gets added to the balance, and a loan reduces cash value and death benefit while it's outstanding.

There's a practical benefit, too. When the loan is paid down fast, the money is available to borrow again. If the market has a correction, I want those funds ready to put to work somewhere else. The policy keeps growing while I do this, so the same dollars earn in two places. If everything goes right, the investor makes money and the banker makes money. If it doesn't, the banker still gets paid back from income.

Investing carries risk, and this isn't advice about what to buy. I'm a licensed insurance broker, not a registered investment advisor, and the investment itself is your decision.

I explained why in the video I made after that viewer's question about weekly payback. If you want help building your own payback habit, setting a payback schedule before you borrow is where to start.