One of the most talked-about features of Indexed Universal Life insurance (IUL) is the ability to borrow from your policy.
You’ve probably heard claims like: “You can borrow from your policy tax-free.”
But what does that actually mean — and how does it work?
Let’s break it down step by step.
Accessing Your Money — The Basics
An IUL offers flexible access to your cash value without the restrictions you might find in retirement accounts. For example:
There are no age restrictions
No early withdrawal penalties like with IRAs
No credit checks or loan applications
And you don’t need to qualify or explain why you need the money
As long as you have available cash value, you can borrow against it — at any time, for any reason.
The Two Types of Loans
IUL policies generally offer two loan types:
1. Indexed Loan (also called a Participating Loan)
Let’s say your policy has $100,000 in cash value.
You decide to borrow $10,000.
The insurance company lends you that $10K from their own funds, and charges you, say, 5% loan interest.
But your full $100,000 stays invested in your indexed account and continues earning based on market performance.
So if your policy earns 7% that year and you’re paying 5% interest, you’re ahead — that’s known as positive arbitrage.
However, if the index earns 0% that year, you still owe the 5% loan interest. So there’s upside potential, but also some risk.
2. Fixed Loan (also called a Wash Loan)
Again, say you borrow $10,000.
This time, the insurer moves $10,000 out of your indexed account and into a loan account.
That loan account earns a fixed interest rate, say 2%.
You also pay 2% interest on the loan.
So you’re paying and earning the same amount — which is why it’s often called a wash loan. However, only the remaining $90,000 stays in the indexed account to grow with the market.
Which Loan Should You Use?
It depends on your goals and your risk tolerance:
Fixed loans are more predictable and conservative.
Indexed loans offer more upside but come with more risk.
Every insurance company handles these a bit differently — so be sure to understand how your policy is structured before you borrow.
What About Withdrawals?
A withdrawal is different from a loan — it’s a permanent removal of funds from your policy.
Example:
If your cash value is $25,000 and you withdraw $5,000, your remaining cash value becomes $20,000.
Simple. But here’s something most people overlook:
Let’s say you’ve paid $20,000 in total premiums and your policy grew to $25,000.
If you withdraw $22,000, the first $20,000 is considered your cost basis — and is not taxable. The remaining $2,000 is taxable income.
This is why many people choose loans over withdrawals — because loans aren’t taxed, and your full cash value keeps working for you inside the policy.
One Important Note About Withdrawals
Whenever you fund your policy, part of the premium gets deducted as charges (like we discussed in the expenses section).
So if you withdraw money now and later try to put it back in, you’ll be charged those fees again.
That’s what makes loans more efficient in many cases — your money never actually leaves the policy.
Smart Withdrawal Strategy in Retirement
Here’s a common strategy once you stop funding the policy:
Withdraw up to your cost basis — this part is tax-free.
After that, switch to policy loans for the rest of your income.
This way, you minimize taxes and keep your policy working as efficiently as possible.
Final Thoughts
Withdrawals are simple, but reduce your cash value and can trigger taxes if you go beyond your cost basis.
Loans give you flexibility, avoid taxes, and allow your money to keep growing — but they come with interest charges and need to be managed carefully.
Used properly, IUL loans can be a powerful retirement income strategy — but only when you understand how they work.
If you’re unsure how your current policy handles loans and withdrawals, it’s worth taking the time to review the details — or get a second opinion.
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