Policy Loans Impact Variable Life Return

You affect the investment results of a variable policy by borrowing from it.

You affect the investment results of a variable policy by borrowing from it. By taking a policy loan, you collateralize the equity from the underlying investment accounts. When this happens, the insurance company moves an amount equal to what you have borrowed to a loan guarantee account not subject to market risk, where it will earn 1 or 2 percent less interest than you are paying for the loan.

The collateralized equity will stay in that account, securing the loan, until such time as the loan is paid off. Therefore, if you borrow on the policy during a period of time when your chosen investment accounts are decreasing in value, you have avoided those potential losses. However, if you have borrowed on your policies during a period of time when your chosen accounts were appreciating, your policy loan has cost you not only the non­deductible loan interest on the loan but also the opportunity cost of what you would have gained on those accounts had you not borrowed.