Costs, fees & taxes
IUL Policy Loans Explained
One of the more flexible features of an IUL policy is the ability to borrow against its accumulated cash value. Policy loans work differently than a typical bank loan, with their own rules on interest, repayment, and what happens if the loan isn't paid back. This page explains the mechanics in plain terms so you understand what you're agreeing to before taking a loan against a policy.
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How does an IUL policy loan work?
When you take a policy loan, you're borrowing against your policy's cash value using the cash value as collateral, rather than withdrawing the money directly. The insurance carrier advances you the loan amount, and the policy's cash value continues to be credited interest according to its normal terms, though some carriers reduce or adjust crediting on the amount used as collateral. There's generally no credit check or approval process the way there would be with a bank loan, since it's secured by your own cash value.
What should you know about Interest on policy loans?
Policy loans accrue interest, charged by the insurance carrier, similar to any other loan. Some IUL products offer what's sometimes called a wash loan or zero-net-cost loan feature, where the loan interest rate and the interest credited on the loaned amount are designed to roughly offset each other, though this depends entirely on the specific carrier and product and isn't universal.
Policy loans accrue interest set by the carrier, similar to other types of loans
Some products offer loan features designed to offset interest costs, but not all do
Unpaid interest is generally added to the loan balance rather than billed separately
Loan interest rates and structures vary by carrier, so terms should be reviewed carefully
What should you know about Repayment is flexible but not optional forever?
You're generally not required to make scheduled payments on a policy loan the way you would with a bank loan, which is part of its appeal. However, that doesn't mean the loan is free to leave outstanding indefinitely. If the combined loan balance and accrued interest ever grow to exceed the policy's cash value, the policy can lapse, and any unpaid loan amount above your cost basis can become taxable at that point.
What happens to the death benefit with an outstanding loan?
If the insured passes away while a policy loan is outstanding, the loan balance plus any accrued interest is subtracted from the death benefit before it's paid to beneficiaries. This means an unpaid loan directly reduces what your beneficiaries receive, which is important to factor in if you're using loans regularly, whether for retirement income or other purposes.
What should you know about Different ways loans are typically used?
Policyholders use IUL loans for a range of purposes, and understanding common uses can help frame how to think about your own situation.
Supplementing retirement income alongside other savings and accounts
Covering unexpected expenses without going through a separate lending application
Bridging a temporary cash flow need while other assets remain invested
Funding a business or other opportunity where quick access to funds matters
What should you know about Monitoring a policy with an outstanding loan?
If you have an outstanding policy loan, it's worth requesting an in-force illustration periodically to see how the loan balance and accrued interest are tracking relative to your cash value, especially if the index hasn't been crediting well. Catching a policy that's trending toward lapse early gives you options, like paying down the loan or adjusting premiums, that become far more limited once the policy is close to lapsing.
Why work with an independent agent?
A captive agent usually represents one company. Our network includes 20+ top-rated carriers, with available options depending on your state and profile. We help compare quotes for coverage and underwriting fit at no cost for comparison, without guaranteeing approval or the lowest price. Policy premiums apply.
Licensed Agent vs. captive agent — the full breakdownFrequently asked questions
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This page is educational and is not an offer of insurance, a quote, or a guarantee of coverage. Underwriting decisions, rate classes, and product availability are determined by each insurance carrier and vary by state, age, and health history. Carrier guidelines change without notice.