Home / Investing / Simple Interest Loan, Funding Compound Returns

Simple Interest Loan, Funding Compound Returns

Certainly, there is no shortage of financial minds out there who shout from mountain tops that whole life insurance is the worst investment known to man, inappropriate for all.  For the most part, I would agree with them.

However, for the right individual, it can function, not as an investment, but as a particularly versatile financing vehicle, that when combined with the right investment strategy, the overall performance is quite compelling.  While it is true that it takes years for a policy to generate even modest returns on premiums paid-in, the cash value builds on an income-tax deferred basis and can serve as a handy source of tax-advantaged liquid capital.

My promise: At no point, in this article, will I attempt to convince you to buy a whole life insurance policy and implement the same strategy.  It’s not for everyone, so no need to force the issue.  As many have inquired about certain line items in my Net Worth schedule pertaining to whole life insurance,  I am simply laying out the mechanics and numbers, as requested.  No chest-pounding. 

Your promise: To keep an open mind, nothing more.  In the end, we all have the same goal in mind – financial independence.  It shouldn’t matter how each one of us achieves this goal, only that we get to join everyone at the party, right?  

And without further ado…


Ever since I was 23 years old, I have been saving money in numerous whole life insurance policies (the mattress).  Every month, I make mandatory premium payments in exchange for stable growth (cash value) and the promise, but not the guarantee of dividends.  

The insurance company, a “participating” company (i.e. dividend paying), must also be a non-direct recognition company.  Being both participating and a non-direct recognition company is extremely important to me because the earnings rate on my cash value is completely unaffected by any loans I take. Once the cash value has built-up, I am able to access the loan feature to serve as a penalty-free and tax-free source of liquidity for emergency use and/or investments.  You read correctly, I have access to the premiums paid in, penalty-free and tax-free.   Conversely, a direct recognition company will pay a dividend off the cash value less any outstanding loans, as illustrated:

Jumping Jehoshaphat! How can this be?

When I borrow money from my policies to make an investment, I am not withdrawing funds from the policy, itself. The insurance company is the one who is lending me money and holds the cash value in my policies as collateral.  Non-direct recognition companies will continue to ‘recognize’ and pay dividends off the total cash value amount.

Stop and digest what you just read….I put cash in a policy and it grows. I borrow from the life insurance company to invest in XYZ.  The insurance company holds my built-up cash value as collateral and a dividend is paid off of the gross cash value (plus accumulated dividends – compound effect).

This is referred to as the Multiple Uses of a Dollar technique, whereby a dollar earns for you, concurrently, in two or more places.

Now think of selling stock in order to fund the down payment for a rental property. Will the company of the issued stock continue to pay you dividends?  Absolutely not, which means the dollars can only be working in one spot at a time – the stock or the rental property, but not both. 

Head spinning?  

It’s perfectly normal.  It took me 10+ years to get to this point and I am still learning new things.  I helped educate myself by drawing it all out and will do the same in the next section.  I believe most people benefit, regardless of perceptual preference, when writing and illustrations are combined.  


Within my Net Worth, I have a liquid asset labeled Life Insurance Cash Value and a liability, reducing my assets, called “Other”.  In this line item are loans I have, with the non-direct recognition insurance company, funding various investments.


Because the loans from the insurance company are charged at a simple interest rate.  Simple interest is called simple because it ignores the effects of compounding – i.e. interest on top of interest. Interest Rate x Outstanding Loan Balance (each annual anniversary date of the policy) is the formula, nothing more.  Can you name another loan out there that applies a 100% of a repayment to the principal before calculating interest?  This is made possible because the cash value, held as collateral, is constantly growing each year.  The insurance company is, therefore, able to offer such favorable terms knowing the compounded growth will always exceed the simple interest.    

So what do the loans in my Net Worth represent?

STEP.1: Borrow. Invest. [Illustration-1] 

Even with stable growth, I do not view my policies as investments.  I analogize them to any other financing vehicle, waiting to deploy capital to the right investment.  For purposes of this post, I will use my account with the real estate crowdfunding platform, PeerStreet.  PeerStreet is a unique online community whereby investors pool their money together into a single investment property, while maintaining direct ownership and earning monthly interest.  Borrowed from the life insurance company at a 4.40% simple interest rate and invested, as illustrated:  

STEP.2: Profit. Reinvest. Repeat. [Illustration-2]

My portfolio of investments in PeerStreet are earning compound interest at an average rate of 8.50%.  Since there is no monthly principal and interest payment to be made on the loan, only annual interest, I have the following three options available with respect to the monthly earnings:  

1) If the monthly PeerStreet earnings accumulate such that I meet the minimum investment threshold, I reinvest immediately and continue the compounding.  

2) Transfer the earnings in the my PeerStreet cash account to my savings account and get it compounding again.  Albeit, a measly 0.50% rate, but always compounding until the minimum is met to be redeployed back into another investment property.


3) Pay down the loan principal amount, reducing the interest payment due next year.


FYI: Don’t forget that in each scenario the cash value in the whole life policies continues to compound while all this is going on…

STEP.3: Simple Interest Payment. [Illustration-3]  

I’ve built a cash flow forecasting model in excel that shows me each month’s earnings and when principal is to be repaid.  I leverage this tool to know which investments will not be reinvested so I can take the earnings and returned principal to service the interest on the loan.  Eventually, the compounded returns will outpace the simple interest and begin to pay down principal on the loan.  

PsstCash value in the policies still compounding…


Again, this is just a very high level view of how this loan strategy works (for me) and many points had to be considered before implementing.  I have made all numbers transparent so that you can run them yourself.  The math is what it is.  Once I understood the mechanics, the hardest part was finding an investment with the right risk profile and return metrics.  

It’s chaotic, complex and by far the ugliest baby out there…but it’s my baby.  Most will only be able to point and stare in horror, but for the right individual, they will be able to see the beauty – liquidity.


  1. What about taxes? I also invest in PeerStreet, in both a pre-tax and post tax account. I am currently earning about 8% overall. The majority of my $80,000 investment capital is in my SD IRA due to our high marginal tax rate.

    With an 8% return, and a marginal tax rate close to 50%, I only expect to net a 4% return after taxes in my regular post tax account.

    Are you accounting for this?

    • Dom, you may be the only person EVER to read and comment on this post. If ever in NYC, I’ve got your bar tab for the night!

      I didn’t display the tax effect or 100 other considerations because I didn’t want to complicate this topic any more than it already is.

      I don’t know that a 50% marginal tax rate exists, but let’s be conservative and assume I am at the highest tax bracket of 39.6%

      Walking through the math using your numbers – the $80k investment (assume non-retirement money) and your 8% return, the results (after 12 months) are as following results:

      $6,639.96 = REVENUE (compound interest earnings from PeerStreet @ 8%)
      -$2,629.42 = TAX EXPENSE ($6.639.96 x 39.6%)
      $4,010.54 = SUBTOTAL

      -3,520.00 = LOAN INTEREST EXPENSE ($80k x 4.40)

      $490.00 = NET PROFIT

      ***Don’t forget that in my strategy, the $80k that I borrowed continues to grow in the policy – i.e. Multiple Uses of a Dollar technique. However, to keep the math simple, I am not incorporating that increase in the overall Net Profit***

      One more thing, I just starting speaking to my CPA about this, but he is exploring whether or not the interest can be taken as an “investment expense” deduction since I have all of my paperwork in order. I am not a tax expert, so consult, consult, consult! Deducting the interest would further increase the performance of this strategy.

      • Hey Church,

        I may actually take you up on your offer. I typically travel to NY once a month for business, but am taking the summer off. Frankly, I don’t particularly like how muggy it is in the summer time.

        Re: Marginal tax rate

        I think you are forgetting about state income taxes, which I am pretty sure NY has, along with city taxes???

        Yes, the highest marginal federal tax rate is 39.6%

        But then I have California state income tax rate that goes up to 13.3%.

        FICA at 2.35% (I only list 2.35%, because the social security piece maxes out on wages of $127,500, which is taxed at 6.2%. Normal Medicare taxes are 1.45%, but increases by 0.9% on wages over $200K, thus the 2.35% because my income from the job already easily maxes out the social security side, and our income is far above $200K)

        So, our projected income is around $400K for 2017, which puts us in the following marginal tax rates:

        Federal: 33%
        State: 10.3%
        FICA: 2.35% (really just for medicare, which doesn’t max out)

        Marginal Tax Rate = 45.65% (ouch, that hurts)

        So, if I go through your same exercise again, for my situation, it looks like this:

        $6,639.96 – REVENUE (compound interest earnings from PeerStreet @ 8%)
        -$3,031.14 – TAX EXPENSE ($6.639.96 x 45.65%)
        $3,608.82 – SUBTOTAL
        -3,520.00 – LOAN INTEREST EXPENSE ($80k x 4.40)
        $88.00 – NET PROFIT

        I do understand that you are still growing the cash value of your whole life insurance policy, but $88 in profit doesn’t leave much room for error or potential losses. I agree that the asset backed investments are safer than non-secured, but they are not immune to losses, even with a 25% or greater equity cushion.

        You end up with only 0.11% return (roughly). I can do better than that keeping the cash in my checking account earning 0.5%.

        It just seems like a lot of work for so little return.

        Now I am not putting down your strategy, just trying to apply your strategy to my own example. I had been intrigued with whole life insurance because of the things you wrote about, but I personally think that returns would have to be higher than 8% for a high income in a high marginal tax rate.

        And based on where I am trying to increase my income, this only gets worse, as at the top federal tax bracket I would pay another 6.6% in federal taxes and another 2% in State taxes, resulting in a marginal tax rate of 54.25%, which would take the profit from +$88 to -$483.

        Now if you can write off the interest against the gains, that would help a lot. Will be curious to hear what you get back from your CPA.

        What would be more interesting to me in this strategy is using the cash value of the life insurance policy, through policy loans, to invest in CF positive real estate. Where most if not all of your earnings will be shielded by depreciation, interest expenses, etc. And in the Mid-west I have seen properties going for prices that would yield 12% or higher cash on cash returns.

        Let’s say you buy one of these houses all cash, and that depreciation & expenses are enough to shield all of the income, thus no tax liability. You will earn the 12% cash on cash, plus your policy return of 4%?, and you get the benefit of amortization on the back end as well. This could potentially yield returns in excess of 20% or more.

        Thanks for allowing my ramblings and thinking out loud.


        • I like how you are challenging the structure because you want to understand, I think that is great.

          Aaaaahhhh……California taxes…..

          Yes, you are correct regarding the 50% marginal tax rate. I, personally, am nowhere near a 50% marginal tax rate, so the structure performs a bit better for me (even here in NY).

          Using your 45.65% tax rate, the return is dismal, can’t argue with that. I think we also can agree that, conceptually, the simple interest loan + investment structure does work, but it must be the right investment. I just used PeerStreet as an example to keep things simple for this post to see if folks would understand.

          I honestly think you get it. Your suggestion about taking a loan for a CF rental property is exactly what my buddy does while taking the depreciation and interest deduction etc. Best part, the rental income that is paying down your mortgage, isn’t going to the bank, it goes back to you.

          Definitely hit me up the next time you are in NYC, we’ll carve some time out for a few cold ones!

  2. How can you put big money into the cash value of the policy without it becoming a MEC? And the state income taxes are how you get to 50% marginal. 😉

    • Hi TJ, great question regarding the MEC.

      My policies have always been structured with riders that allow for addition money to flow into them without MEC’ing out. Specifically, Paid-Up Additions Rider. This enables you to vary the amounts allocated to the rider and the base premium, you will be able to approach, but not exceed the MEC line. By doing this, you de-emphasize the death benefit and accentuate the cash values. I’m young, who cares about the death benefit, I want the cash value growth. With the right financial professional, you can tailor these policies to your liking and never come near the MEC.

      50% Marginal tax rate, understood. Fortunately, I am nowhere near that.

      Thanks for the question!

  3. Using your strategy, you can only borrow (and invest) up to the cash value amount of the whole life policy. How does the cash value compare to the premiums paid?

    The beef most financial people have with whole life policies is, the premiums are so expensive that one is generally better off financially to pay for a dirt-cheap term life policy and use the money saved (compared to the whole life premiums) to invest elsewhere from day one (e.g. your Peer Street account). With your method, you have to wait for cash value to build up in order to invest in your Peer Street account. You need to give some actual numbers for your premiums paid and cash value available over various time spans, in order for people reading this to get a sense for whether your whole life strategy is a good financial decision, versus buying term life and investing separately.

    • Hi Glen. I really do appreciate you visiting and leaving a comment. Please allow me to reply in the order you wrote the comment:

      Comment: “Borrowing cash value” – You are correct, I am only allowed to borrow up to 80% of the cash value, so that the policy isn’t tainted and creates a tax issue for me.

      Comment: “Cash Value vs. Premiums Paid-in” – If the point is trying to determine the “return”, than I will say that this isn’t how I view life insurance (i.e. its a financing vehicle not an investment). If the point is that the premiums paid-in take a long time to build cash value, then I would 100% agree with that. In the second paragraph of my post, I have stated, “…it takes years for a policy to generate even modest returns on premiums paid-in…” That being said, I have 5-pay and 10-pay policies than build cash value much quicker than traditional whole life policies so that I can access the cash today, vs 7-10 years from now.

      Comment: “Premiums are expensive” – I would agree with this and also add that when I purchased my first couple of policies, I was young – which is a premium advantage. My oldest policies are the cheapest and are locked in for all time. Putting $100/month away in these old policies is no different than putting the $100 into a savings account, only added benefits.

      Comment: “Buy term, invest the difference” – I’d be curious to see poll results to see how many people actually invest the difference. Have folks actually gone to an insurance agent, priced out a $10k/year whole life policy, bought $500/year term and now invest $9,500 a year?

      Comment: “Peerstreet” – Real estate crowdfunding didn’t exist when I first opened up 2/3’s of my policies. My 401k was maxed out, I was disqualified from contributing to an IRA and whatever was left over from investing into the market was put aside into my policies – waiting for an opportunity like PeerStreet. Again, no difference than a savings account, but with added benefits.

      Comment: “Actual numbers to depict the time span” – As my post states, this is not for everyone and it does take time to build cash value. I have various policies that have cash value in the second year and others that started building in year 5. A policy can be structured in some many different ways, that like every personal finance decision – it depends on one’s individual situation. In the beginning, I only had so much money to set aside to save (after investing), so time was on my side. As I got older and my career advanced, I was able to structure new policies with faster cash value build, albeit a larger premium. But at this stage in my life, I was managing my money more efficiently.

      Any other investment, time is need for growth. The whole life financing strategy is no difference. But once it’s up and running, it’s most advantageous because an investment doesn’t grow once it sold (less capital gains taxes, less expenses and possibly at the moment the markets takes a tremendous slip ad fall).

Leave a Reply