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IUL Policy Loan vs Bank Loan

June 3, 2024
 min read
CEO, Capital for Life

IUL Policy Loan vs Bank Loan: Which Is Best for You?

Understanding Indexed Universal Life Insurance Policy Loans

What is an IUL Policy Loan?

An index universal life insurance policy has a cash value, known as the policy's cash value, that you can access in the form of a loan.

The life insurance company lends you the money, using your policy as collateral.

It acts as a personal line of credit with flexible repayment terms, competitive interest rates, and no credit checks.

You can usually repay the loan on your schedule, but it must be repaid in full (with interest) upon death.

Comparing IUL Policy Loans to Bank Loans: Key Differences

10 reasons why borrowing from an IUL policy can be more advantageous than taking a bank loan:

  1. No Credit Check: Borrowing against your IUL policy doesn’t require a credit check.
  2. Lower Interest Rates: IUL policy loans often have lower interest rates compared to bank loans.
  3. Flexible Repayment: You generally have more flexibility in how and when you repay an IUL policy loan.
  4. No Impact on Credit Score: IUL policy loans do not affect your credit score.
  5. Privacy: Borrowing against your IUL policy is a private transaction between you and the insurance company.
  6. Quick Access to Funds: IUL policy loans are often processed quickly, providing you with access to funds when you need them.
  7. No Collateral: Your life insurance policy itself acts as collateral for the loan, leveraging the life insurance cash value.
  8. Tax Advantages: Sometimes, the interest paid on IUL policy loans may be tax-deductible.
  9. Potential for Loan Forgiveness: If you pass away with an outstanding IUL policy loan, the loan amount is typically deducted from the death benefit, effectively forgiving the debt.
  10. Builds Cash Value: The cash value of your IUL policy can continue to grow even while you have an outstanding loan.
  11. Life Insurance Policy Loan: Life insurance loans allow borrowers to use the accumulated cash value of a permanent life insurance policy as collateral. This can help avoid traditional loan requirements, such as credit checks and income verification. However, it's important to consider the potential impact on death benefits and possible tax consequences when borrowing against the cash value of the policy.

Bank Loan Disadvantages

10 reasons why borrowing from a bank might be less advantageous than borrowing against an IUL policy:

1. Strict Qualification Requirements: Banks often have stringent credit score and income requirements, making it difficult for some individuals to qualify.

2. Higher Interest Rates: Bank loan interest rates can be significantly higher than the interest charged on IUL policy loans.

3. Collateral Requirement: Many bank loans require collateral, putting your assets at risk if you cannot repay the loan.

4. Fixed Repayment Schedule: Bank loans typically have fixed monthly payments, which may not be flexible if your financial situation changes.

5. Potential Fees: Bank loans can come with origination fees, prepayment penalties, and other charges.

6. Impact on Credit Score: Late payments or defaulting on a bank loan can negatively affect your credit score.

7. Limited Loan Amounts: The amount you can borrow from a bank may be limited based on your creditworthiness and income.

8. Purpose Restrictions: Some bank loans have restrictions on how you can use the funds.

9. Longer Approval Process: Getting approved for a bank loan can take time, involving paperwork and credit checks.

10. Privacy Concerns: Bank loans involve sharing your financial information with the lender.

When a Bank Loan Might Be a Better Option

  • It can take many years to build up enough cash value in a permanent life insurance policy before you can take a life insurance policy loan.
  • The death benefit will be reduced if you don’t repay the loan during your lifetime.
  • You still pay interest on life insurance policy loans, which need to be monitored and tracked so that your life insurance policy does not lapse.

IUL Loans Important Considerations

• While IUL policy loans offer numerous advantages, it’s important to remember that unpaid loan interest can erode your policy's cash value and may eventually lead to the policy lapsing.

• It’s always advisable to consult with a financial advisor to determine the best borrowing option for your specific needs and circumstances.

Next Steps

Applying for an IUL Policy Loan

  • Taking out a life insurance policy loan is relatively straightforward if you already have an IUL account open.
  • The approval process typically involves your insurance company and agent.
  • You can typically take a loan against your index universal life insurance policy’s cash value component as soon as it exceeds your insurer’s minimum requirement, making borrowing against the policy's cash a flexible option.

Monitoring Your Life Insurance Loan

  • Once your loan is in place, proactive monitoring is key to ensure your financial goals and life insurance coverage stay on track.
  • You can borrow against your life insurance policy while still alive, using the policy's cash as collateral.
  • The loan balance accumulates interest, and you can choose to repay the loan or just the interest.


An IUL policy loan is a unique financial tool that allows you to access a portion of your accumulated cash value within your Indexed Universal Life insurance policy. It acts as a personal line of credit with flexible repayment terms, competitive interest rates, and no credit checks. Unlike traditional loans or life insurance premium financing, where you borrow money from a third party to pay your premiums, a life insurance policy loan leverages the value you've already built within your IUL policy. It won't impact your credit score and offers potential tax advantages, making it a valuable resource for funding various financial needs while your policy continues to grow.

Frequently Asked Questions (FAQs)

What is the main difference between an IUL policy loan and a bank loan?

A life insurance loan is borrowed against the cash surrender value of your Indexed Universal Life insurance policy, while a bank loan is obtained from a financial institution and typically requires a credit check.

Which is better for a quick cash infusion: IUL policy loan or bank loan?

An IUL policy loan may be faster and easier to access if you have sufficient cash surrender value, as it doesn’t require a credit check. However, a bank loan could be a quicker option if you need a large sum and haven’t built up enough cash value in your policy.

How do interest rates compare for IUL policy loans and bank loans?

Interest rates on IUL policy loans can be competitive, but they can vary depending on the policy and the insurer. Bank loan rates are also variable and typically depend on your creditworthiness.

Will taking an IUL policy loan affect my credit score?

No, an IUL policy loan does not affect your credit score because it's not reported to credit bureaus.

Can I still get a bank loan if I have an outstanding IUL policy loan?

Yes, you can still get a bank loan even if you have an IUL policy loan. However, the outstanding loan and its repayment terms might be considered when the bank assesses your overall debt-to-income ratio.

Is the interest on an IUL policy loan tax-deductible?

Generally, interest on IUL policy loans is not tax-deductible. However, there might be exceptions depending on specific circumstances, so consult a tax advisor for personalised advice.

What happens if I can't repay my IUL policy loan?

If you can't repay your IUL policy loan, the outstanding balance (including interest) is usually deducted from your death benefit. In some cases, if the loan balance exceeds the available cash value, the policy might lapse.

Which is more flexible in terms of repayment: IUL policy loan or bank loan?

IUL policy loans generally offer more flexibility in repayment. You can choose to pay interest only, make partial payments, or repay the loan in full at any time. Bank loans typically have fixed repayment schedules.

Can I use an IUL policy loan for any purpose?

Yes, you can use an IUL policy loan for any purpose, such as covering unexpected medical expenses, funding education, supplementing retirement income, or investing in real estate or business opportunities.

Which option is best for maximising my life insurance death benefit?

If your priority is to maximise the death benefit for your beneficiaries, a bank loan might be a better option, as it doesn't directly impact your life insurance death benefit amount on payout.

High-net-worth individual?  Don't miss out on the benefits a Manulife life insurance policy can offer you. As a preferred partner of financial advisors, private bankers, and wealth managers, Capital for Life is uniquely positioned to provide tailored solutions for your financial needs.

Secure your financial future and your legacy – contact Capital for Life today for a personalised IUL quote.

Interested in maximising the financial flexibility of your Indexed Universal Life (IUL) policy? Life insurance policy loans offer high-net-worth individuals a strategic alternative to traditional bank loans. As a trusted life insurance broker specializing in IUL policy loan strategies, Capital for Life is the preferred partner of financial advisors, private bankers, tax advisors, and wealth managers seeking the best solutions for their high-net-worth clients.

Ready to discover how IUL policy loans can enhance your financial strategy? Contact us today and let our experts guide you through the benefits and possibilities.


This article is written by Carlton Crabbe, Chief Executive Officer of Capital for Life, a specialist life insurance agency providing international life insurance solutions. The information provided in this article is for educational and informational purposes only and should not be construed as financial or investment advice. While the author possesses extensive expertise in international life insurance, readers are advised to consult with a qualified financial advisor before making investment decisions or purchasing insurance products.

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