Access & Cost
By Steven Spencer Washington licensed life insurance producer Reviewed October 11, 2026
Yes — an IUL policy may let you borrow against its cash value, but a policy loan is not free money. You are borrowing from the insurer using your policy's cash value as the source of security. Interest accrues on the loan, the death benefit can be reduced if the loan is unpaid, and if the policy's value cannot cover the growing loan and its interest, the policy can lapse. Whether a loan is available at all depends on your specific contract and how much available cash value you have at the time.
A policy loan is made by the insurance company, secured by your policy's cash value. In most contracts, the amount you can borrow is limited to a percentage of available cash value, and a portion of your cash value continues to serve as collateral until the loan is repaid. The carrier typically charges interest, and the rate — fixed, variable or a blend — is set out in the contract.
Two details matter more than people expect. First, loaned value may receive different interest crediting depending on whether the contract uses a standard, participating or indexed loan. Some loan arrangements continue index crediting on value securing the loan; neither positive net loan results nor a spread above the loan interest charge is guaranteed. Second, an unpaid loan is not simply "forgiven" at death — the insurer generally subtracts the outstanding loan and interest from the death benefit paid to your beneficiaries. Both the Washington Office of the Insurance Commissioner and the WA OIC life insurance guide stress reading the contract for loan terms before relying on them.
Interest continues to accrue on the outstanding loan whether or not you repay it, and it compounds against a policy that may not be earning enough to offset it.
Lapse risk increases. If cash value is consumed by charges and loan interest faster than it grows, the policy can lapse — potentially leaving you with a tax bill on any gain and no coverage.
Death benefits and cash value can shrink. An unpaid or partially repaid loan reduces what beneficiaries receive and what remains as accessible value.
Tax treatment is not automatic. Tax treatment depends on policy status and tax classification, including whether it is a modified endowment contract (MEC). MEC loans can be taxable; a lapse or surrender with an outstanding loan can also create taxable income. Discuss your circumstances with a qualified tax professional.
Contract mechanics like these vary by insurer. For a plain-language illustration of how loan interest and benefit reduction can interact with policy value, see this overview of borrowing against a life insurance policy. It describes one carrier's approach — not identical terms across every policy.
Around Bremerton, Silverdale, Port Orchard and the rest of Kitsap County, families often ask whether a policy loan is a smart way to handle a short-term expense. It can be reasonable when the need is temporary and the loan is repaid — but it deserves the same scrutiny as any borrowing decision. A policy loan is access to your own policy value, subject to the contract, not a benefit that comes without cost.
Related reading
Can you skip IUL premiums?, what a crediting floor does and does not protect, and how to read an IUL illustration. Back to the Insurance Insights hub.
This page provides general insurance education, not personalized tax or investment advice. Policy terms, loan provisions, guarantees and illustrations vary by contract and govern actual results. Insurance is provided by Steven Spencer individually; Chief Investment Properties LLC is not a licensed insurance agency. Tax questions should be directed to a tax professional.
Discuss Your Options With StevenUsually not. Most contracts allow a loan up to a percentage of available cash value, and the rest stays as collateral. The exact limit is in your policy.
Many contracts do not force a scheduled repayment, but interest continues to accrue. An unpaid loan reduces the death benefit and can eventually cause the policy to lapse.
Generally not while the policy remains in force, but a lapse or surrender with an outstanding loan can create taxable income. Ask a tax professional about your situation.
No. Loan availability, interest rates and how loans affect crediting vary by contract and can change within what the contract allows. Always read the specific policy.
Every contract is different. Steven can walk through the questions above with you and help you find the answers in your actual policy — no obligation, no application started.