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Borrowing Against Life Insurance

IUL Loan
Insurance Quotes 2 Day Team

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner   &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

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Borrowing against life insurance is a proven concept that can help you reduce dependence on banks and create a tax-free retirement plan.  While this concept is becoming more and more popular, it is important that you understand how to use a whole life loan or IUL loan properly.

It’s common for people to purchase life insurance policies as a way to provide financial safety for their family when they die. However, some life insurance policies like Indexed Universal Life (IUL) can also provide living benefits, such as being able to borrow money from the life insurance company using your policy’s cash value as collateral.

It always makes sense to understand the pros and the cons to determine the answer to “Should I borrow against life insurance?” before calling the insurance company and asking for a loan.

Do you already have an IUL  or whole life policy working for you, or do you need us to design a policy for you?

We can also review your current policy to see if it was designed properly when you started it.  If cash accumulation and tax-free distributions are your goal, the correct policy design is crucial.

We are happy to help. Call us at the phone number on this page or use our IUL Calculator to start the planning and design process.

Can I take a Whole life or an IUL Loan?

First things first. To borrow against your life insurance policy, the policy must be the type of life insurance with a cash-value account. Term insurance will not work.

Your IUL policy should be structured so that the majority of your contribution is going into the cash value account.  This cash value is what determines just how much is available for loans.

In other words, you can’t borrow $2,000 from an insurance policy when the cash value account is only $500.

There are huge advantages to borrowing against your life insurance cash value versus borrowing from a traditional lender or using a credit card.

  • Taking an IUL loan can be done for any reason.
  • There is no credit check.
  • You can pay back the loan how you see fit or not pay it back at all.
  • The cash value that you have collateralized will continue to earn tax-deferred interest.
  • The IUL loan interest rate is generally lower than what a traditional lender charges.
  • Most IUL policies offer a wash loan or zero-cost loan.
 

How Much Can You Borrow from a Life Insurance Policy?

How much you can withdraw (borrow) from a life insurance policy depends on the insurer, but the maximum policy loan amount is generally 90% of the cash value but no minimum amount.

Taking out a policy loan doesn’t mean you’re taking some cash out of your life insurance policy. In fact, when you take out a policy loan you’re borrowing from the insurance company, and only using your cash value as collateral. This is significant because your cash value remains in the life insurance policy and continues to accumulate interest.

Your monthly repayment is flexible. That said, if you fail to pay the annual interest that is usually fixed or variable, the interest will go onto your outstanding.  This is normal and a great reason for borrowing.  The loan doesn’t need to be paid back while you are living because the insurance company will pay the loan off at your death and the remainder will go to your beneficiaries.

What is the best time to take a Life Insurance Loan?

As long as you have sufficient cash value in your policy, any time is a good time to borrow against your policy. Your insurance policy can become a personal bank that you can use during your lifetime and recapture interest that you would pay to a traditional lender or credit card company.

For example, if you plan to buy your teenage son or daughter a used car for their 17th birthday, it would be much easier and quicker to take out a policy loan than to ask your banker to loan you the money.  In December of 2023, the average used car rates can range from 7% upwards to 20% depending on credit score.

Your IUL policy will continue to earn tax-deferred interest that could substantially offset the interest that your insurance company charges.  You repay the loan or your terms rather than the bank’s terms.

Even if you have the cash available to purchase the vehicle, you could be better off taking a loan against your life insurance policy.  Your policy continues to grow, and your cash is free to use on other expenditures.

There’s no credit check or loan application when you borrow against your life insurance policy.

Many people own cash-value life insurance for the sole purpose of using it to provide a stream of tax-exempt income during retirement and consider the death benefit secondary.

Additionally, as you get closer to your pre-determined retirement age, you would likely need a lower death benefit for surviving loved ones, so why not take that money for retirement? This type of retirement planning is called a LIRP IUL or Life Insurance Retirement Plan.

How Do You Borrow Against Your Life Insurance?

Taking a loan (notice I didn’t say “asking for a loan?”) is quick and easy. First, call the company and find out what funds are available, and if they are sufficient for your purpose, let the representative know that you’d like to borrow against the available funds.

Since this is not a traditional loan, there is no underwriting process or credit check, only a one-page form you can complete online and electronically sign for the loan.

You can set up a repayment schedule or not. It’s your call. The insurance company will set the interest rate you can pay monthly or annually.

If you decide not to pay the loan or loans back, your insurance company will deduct the outstanding loans and interest from the death benefit when you die.

Moreover, if you decide to take loans as a retirement income stream, you’ll not have to worry about tax liability because loans are not taxable.

What are the pros and cons of borrowing against life insurance?

It’s always good to understand the pros and cons of borrowing against a cash-value life insurance policy:

Pros:

  • You can borrow against your insurance policy’s cash value for any reason
  • There are no qualifiers other than having sufficient cash value for collateralizing your loan.
  • Your loan is not reported to credit bureaus
  • No set repayment schedule (unless you want one)
  • Current interest rates are lower than rates from a traditional lender
  • Your cash account continues to earn interest
  • Allows you to recapture interest you would have paid on a traditional loan

Cons:

  • If you died before paying off outstanding loans, your death benefit would be reduced by the sum of the outstanding loan(s) and interest.
  • Unless you have purchased a single premium insurance policy, it can take time before your cash value grows enough to be used as collateral.
  • You will likely have tax liability if you borrow from a modified endowment policy.
  • “Overloan” consequences. If your loan(s) against your life insurance exceeds 90% of the policy cash value, your policy could lapse.  This can be overcome by purchasing a policy with an overloan protection feature.

Frequently Asked Questions 

How soon can I get a loan against my life insurance policy?

As soon as the first year you buy your policy. You will only be able to access approximately 90% of the cash surrender value. You can speed up the process by paying more than the minimum required premium.

Does borrowing from my IUL policy affect my credit score?

Since borrowing against your IUL cash value does not require a hard credit inquiry, it will not affect your credit score.

Is my cash-value account frozen when I take out a policy loan?

Since the money you borrow is not withdrawn from your cash-value account, it will continue to earn interest (and dividends if a participating policy). Additionally, the interest earned will help offset the interest the insurer will charge for making the loan.

Can I borrow against my life insurance at work?

Since insurance policy loans can only be made against cash-value life insurance and most employer-sponsored life insurance policies are Term Life Insurance, you would probably not be able to borrow against that policy.

Indexed Universal Life Policy Loans

Indexed Universal Life (IUL) insurance is a unique type of life insurance that has many important features. One of the key benefits of owning this type of policy is the ability to access funds from its cash value without having to pay income tax. This is done through IUL policy loans. Some people have also used this very same benefit to live off 100% of the cash value produced from their IUL policy during retirement. You can access the cash value account in your IUL policy without incurring income tax through a policy loan. Why? IRS provisions on IUL policies allow you to take out a loan and not have to pay any income tax on it. In fact, you can even decide whether or not to repay the loan. Some people might wonder if IUL insurance is right for them. When structured properly, loans could be one of the most important features of an IUL for the right person. But before you purchase this type of insurance policy, learn more about how it works to ensure that it is right for you.

Different Types of IUL Policy Loans

When you have cash surrender value in your IUL policy, you can take a loan against it.  Here are some options you have:
  • Partial Withdrawals – This is not a loan. When it comes to IUL policies, there’s an option to partially withdraw cash value for tax-free purposes. There is a chance that you will permanently lower the death benefit on your policy if you withdraw a partial amount. You can withdraw cash to your basis in the policy.  This amount is not taxable.  If you withdraw interest that was earned, you will be taxed on that amount.
Partial withdrawals are subject to a minimum amount and a surrender charge if applicable. When it comes to the specifics of this, you should refer to your policy for more information.
  • Variable Interest Rate Loans – In the 21st Century economy, people like to get loans against the value of their insurance policies. Particularly popular are variable rate loans, which have an interest rate determined by a published monthly average. This average is usually Moody’s Corporate Bond Yield Average as published by Moody’s Investor Services, Inc.
The rate of interest will never be higher than the maximum variable loan interest rate. That rate can change at each policy anniversary based on the current published monthly average. Variable-rate loans offer an interest rate that can change over time. Although the rate will fluctuate based on the Index Selections or Fixed Account, the loaned portion of your cash value continues to earn interest as if a loan has not been taken. Since the loaned amount continues to earn interest, your cash value will continue to grow inside your policy.
  • Fixed Rate Loans, standard loans or wash loans – for a more conservative approach, standard loans are available.  When taking a loan from your policy using the standard loan, your funds will only grow at the fixed account interest rate.  Your standard loan rate is also charged at the same rate.  That is why this loan option is sometimes called a wash loan.  There is no cost to borrow from your policy since the amount you borrow will only earn the fixed account rate.  This rate is usually between 1.5% and 4%.
  • Fixed participating loan – Fixed participating loans are kind of a mix between variable loans and fixed loans.  They allow your cash value to continue to earn interest based on your chosen interest allocation, but the interest rate charged will be higher than the normal fixed loan rate.  Most carriers currently charge around 5% for the fixed participating loan.  Not every carrier has this option but it is becoming more popular.

How Much Can You Borrow from an IUL Policy?

How much you can withdraw (borrow) from a life insurance policy depends on the insurer, but the maximum policy loan amount is generally 90% of the cash value but no minimum amount. Taking out a policy loan doesn’t mean you’re taking some cash out of your life insurance policy. In fact, when you take out a policy loan you’re borrowing from the insurance company, and only using your cash value as collateral. This is significant because your cash value remains in the life insurance policy and continues to accumulate interest. Your monthly repayment is flexible. That said, if you fail to pay the annual interest that is usually fixed or variable, the interest will go onto your outstanding.  This is normal and a great reason for borrowing.  The loan doesn’t need to be paid back while you are living because the insurance company will pay the loan off at your death and the remainder will go to your beneficiaries.

Overloan Protection Benefit

A major concern about long-term loans is the compounding interest. If you have a loan that stretches over many years the balance can seem very large. Always make sure that your policy contains the overloan protection benefit.  This feature guarantees that your policy will not lapse due to a loan that becomes too large. Make sure you monitor your policy once you start taking loans.  Once a year at your policy anniversary is plenty.  Although borrowing money from your policy might seem like a viable option in the short term, it can lead to problems if you borrow too much or fail to make interest payments.

Pros and Cons of IUL Policy Loans

IUL insurance policy loans are the biggest reason that the policy is so attractive. You have access to your money with no loan application, just a quick call to your advisor and you should have a check within a week.

Pros:

  • You’ll be able to borrow against your life insurance policy with no credit check or proof of income. You’ll just need to prove your identity, which is necessary for all loans.
  • Life insurance collateral loans can be a quick and easy solution to get cash when you need it, such as for an emergency medical expense. Alternatively, they can act as a bridge while another loan application is going through the approval process.
  • Once you’ve decided to retire, your IUL cash value can serve as a source of tax-exempt income that will help to offset your tax liability associated with traditional retirement investments.
  • Your IUL insurance policy can be an excellent alternative if you are not sure whether you’ll need the money for a short or long time. You won’t have to pay back the loan.  Borrowing from your life insurance policy is an excellent way to get access to cash whenever you need it, with no interest, no repayment requirement, and no income tax liability.

Cons:

  • If your outstanding loan balance plus unpaid interest exceeds your cash value, the policy could lapse unless you have an overloan protection feature.
  • Outstanding loan balances and interest will be deducted from the death benefit when you die.
  • If you have a policy without the overloan protection feature and your policy lapses with an outstanding loan, that amount could be taxable to you.
author avatar
Doug Mitchell, CLU Independant Advisor
Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent almost 30 years in the life insurance industry and has also held licenses to sell securities, long-term care insurance and home and auto insurance. Doug is a Top of the Table Million Dollar Round Table member (MDRT).  MDRT is a global, independent association of the world's leading life insurance advisors.  For two years, Doug served as President of the Auburn Opelika Association of Financial Advisors and has been a member of the Million Dollar Round Table. He obtained Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award. Later in his career with New York Life he was an Executive Council Member. Doug currently serves as President of Ogletree Financial, a managing general agency serving life insurance agents and clients in all parts of the United States. Today, Doug’s main focus is servicing 1000s of policyholders and growing the agency through the reach of  insurancequotes2day.com.