Summary
An IUL policy loan lets you borrow against your policy's cash surrender value while the cover stays in force. The choice between a fixed loan and a participating loan turns on one number: the spread between what you are charged and what the borrowed value is credited.
- A fixed loan moves the borrowed value into a separate loan account at a declared crediting rate. Charged 5.75% against a 4.50% credit, the net cost on $100,000 is $1,250 and it is known in advance.
- A participating loan leaves the borrowed value in the index strategy. Charged 4.75% against a 6.00% index credit, the same $100,000 produces a $1,250 gain — but only if the index delivers.
- In a zero-credit year the fixed loan still costs $1,250. The participating loan costs the full $4,750, because the interest is payable whether or not a credit is applied.
- Most insurers lend up to 80–90% of cash surrender value, and any outstanding loan plus accrued interest comes off the death benefit, $2,900,000 on a $3,000,000 policy.
Introduction
Accessing liquidity shouldn’t always mean selling assets or approaching the bank.
For high-net-worth clients, Indexed Universal Life (IUL) insurance provides a more private option — the ability to borrow against policy cash value while keeping protection intact and growth potential alive.
An IUL loan works like a personal credit facility built inside the policy. Whether used for opportunity funding, estate liquidity, or retirement planning, it’s a useful feature when managed correctly.
This article breaks down the difference between Fixed and Participating (Indexed) loans, shows how to calculate each, and highlights the core points advisers must consider before using them in client plans.
What Is an IUL Policy Loan?
An IUL loan lets you access part of your policy’s cash surrender value while keeping your life insurance in force. The insurer advances the loan and charges interest; your policy acts as collateral.
Depending on the loan type, the borrowed value may continue earning index credits or switch to a separate loan account. When the insured passes away, any loan and interest are deducted from the death benefit before payout.
IUL Fixed Loans
How Fixed Loans Work
- The insurer transfers the borrowed cash into a loan account.
- You pay a loan interest rate declared by the insurer.
- The borrowed funds earn a loan crediting rate, usually lower than the normal index strategy.
- The spread between these rates is your net cost.
Fixed Loan Example
Year 1 Interest Calculations
- Interest Payable: $100,000 × 5.75% = $5,750
- Interest Credited: $100,000 × 4.50% = $4,500
- Net Loan Cost: $5,750 − $4,500 = $1,250
Impact on Death Benefit
If the insured dies with a $100,000 loan:
$3,000,000 − $100,000 = $2,900,000 to beneficiaries.
Summary: Predictable borrowing cost of 1.25% and continued life cover.
IUL Participating / Indexed Loans
How Participating Loans Work
- The borrowed value stays in the index strategy.
- You still pay loan interest, but there’s no separate account.
- The outcome depends on the spread between the loan rate and the index credit.
- If index credit > loan charge → positive arbitrage.
- If index credit < loan charge → net cost.
Indexed Loan Example
Year 1 Interest Calculations
- Interest Payable: $100,000 × 4.75% = $4,750
- Interest Credited: $100,000 × 6% = $6,000
- Net Result: $4,750 − $6,000 = –$1,250 (Gain)
Summary: Positive arbitrage — the policy effectively earns $1,250 more than it pays.
Collateral & Loan-to-Value (LTV)
- Cash surrender value acts as collateral.
- Most insurers allow borrowing up to 80–90% of CSV.
- If loans and interest approach the total value, additional premium or repayment is required to prevent lapse.
Key Factors Driving Loan Outcomes
Top 5 Adviser Considerations
- Confirm loan type (fixed or participating).
- Check loan rate mechanics and whether variable or capped.
- Understand spread provisions (“wash” or “preferred” loans).
- Review how the loaned amount is credited.
- Confirm interest compounding frequency and repayment options.
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Summary Table: Fixed vs Participating Loans
Conclusion
Both loan types can serve clients well when used with discipline. Fixed loans suit those wanting predictability, while participating loans reward index-linked growth.
For advisers, success lies in managing loan spreads, LTV ratios, and policy health to preserve both liquidity and protection.
IUL Loans Explained: Fixed vs Participating (Indexed) Policy Loans
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About Carlton Crabbe
Carlton Crabbe is Founder and CEO of Capital for Life, with close to 30 years of specialist experience in international life insurance structuring for (U)HNW clients and their advisers. Email Carlton at carltoncrabbe@capitalforlife.com.
