Updated: Sep 3
This is another misconception that floats around out there, so allow me to help clarify this.
If we look at life insurance as property (and there are MANY comparisons), then we are borrowing against the accumulated cash values in the property – exactly like we would borrow against the equity of a home. When we borrow against the value of a home, we pay interest. This works exactly the same way (except it is not tax-deductible).
Within a life insurance illustration, there are promises of returns to be made by the insurance company. If or when you borrow against the policy, the insurance company no longer has those funds to generate the promised return. In order to have the revenue to pay the promised returns, interest must be charged.