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How Much Can I Borrow From My Universal Life Insurance Policy?

Universal Life Insurance


Universal life insurance is a unique financial instrument that combines life insurance protection with an investment component. While it offers flexibility and potential growth, it also comes with the opportunity to borrow against the policy. This guide provides a deep dive into understanding the dynamics of borrowing from a universal life insurance policy.

Brief explanation of universal life insurance

Universal life insurance is a type of permanent life insurance that offers both a death benefit and a cash value component. Unlike term insurance, which only provides coverage for a specified term, universal life insurance lasts for the lifetime of the insured, as long as premiums are paid.

Overview of borrowing from life insurance policies

Borrowing from your life insurance policy, especially a universal life policy, is akin to taking a loan against the cash value you’ve accumulated over the years. This feature provides policyholders with financial flexibility during times of need.

Understanding Universal Life Insurance

Definition and key features

Universal life insurance provides lifelong coverage and consists of two primary components: a death benefit and a savings component (cash value). Policyholders have the flexibility to adjust premiums and death benefits, subject to certain limits.

Types of universal life insurance: Indexed, Guaranteed, and Variable

  • Indexed Universal Life: Ties the cash value component to a specific market index, typically the S&P 500. It offers a guaranteed minimum interest rate but can earn higher returns based on market performance.
  • Guaranteed Universal Life: Designed to provide lifetime coverage with a guaranteed death benefit, provided premiums are paid. The focus here is less on cash value accumulation and more on long-term coverage.
  • Variable Universal Life: Allows policyholders to invest the cash value in various investment options, similar to mutual funds. The cash value and death benefit can fluctuate based on the investment’s performance.

Understanding cash value in universal life insurance

The cash value in a universal life insurance policy grows over time, based on premium payments, interest rates, and policy charges. It offers a tax-deferred advantage, meaning you’re not taxed on the growth until you make withdrawals.

The Basics of Policy Loans

What is a policy loan?

A policy loan allows the policyholder to borrow money against the accumulated cash value of their universal life insurance policy. This is treated as a loan and not as a withdrawal, so it’s typically tax-free.

Differences between policy loans and traditional loans

  • Collateral: In policy loans, your policy’s cash value acts as collateral, while traditional loans may require external collateral.
  • Interest: The interest on policy loans is typically charged against the cash value. Traditional loans don’t have this feature.
  • Credit Checks: Borrowing from your policy generally doesn’t require credit checks, unlike most traditional loans.

Benefits and drawbacks of policy loans

  • Benefits:
    • No credit checks or approval process.
    • Flexible repayment terms.
    • Can be tax-free if managed properly.
  • Drawbacks:
    • Reduces the death benefit if not repaid.
    • Can lead to policy lapse if the loan plus interest exceeds the cash value.
    • Interest accrual can diminish the cash value.

How the Cash Value Accumulates

Premium payments and their role

Premium payments are a significant factor in cash value accumulation. A portion of your premium goes towards the insurance cost, policy fees, and other charges. The remaining portion is added to the cash value, where it grows on a tax-deferred basis.

Interest rates and their impact

The cash value earns interest based on the current rate provided by the insurer. This interest can play a significant role in increasing the cash value over time, especially in policies where the rate is linked to market performance.

Policy charges and expenses

Universal life insurance policies have various charges like mortality costs, administrative fees, and possibly fund management fees (in the case of Variable Universal Life). These charges are deducted from the cash value, impacting its growth.

Partial withdrawals vs. policy loans

Partial withdrawals are when you take out a portion of your cash value, reducing both the cash value and the death benefit permanently. On the other hand, policy loans are temporary borrowings against the cash value and can be repaid to restore the original policy values.

Determining How Much You Can Borrow

Factors affecting borrowing amount

  • Cash value accumulated in the policy.
  • The policy’s terms and conditions.
  • Any previous loans or withdrawals.

Percentage of cash value available for loans

Insurers typically allow policyholders to borrow up to 90% of the policy’s cash value. However, this percentage can vary based on the insurer and the policy’s specifics.

Outstanding policy loans or withdrawals

Any existing loans or withdrawals can reduce the available loan amount. It’s essential to account for these when considering a new loan.

Current policy status

If a policy is in a grace period or is at risk of lapsing, it may affect the loan amount or even the ability to take a loan.

Using online calculators and tools

There are several online calculators available that can help determine how much you can borrow from your policy. Tools such as Insurance.com offer insights and calculations specific to various policy types.

Consulting with insurance agents and financial advisors

It’s always a wise decision to consult with professionals who can provide personalized advice based on your policy details and financial situation.

The Borrowing Process

How to request a loan

Contact your insurance provider to request a policy loan. They’ll provide the necessary paperwork and guidance on the process.

Evaluating loan interest rates

The interest rate on policy loans varies by insurer and policy type. Ensure you understand the rate and how it’s applied to your loan.

Duration and repayment terms

Policy loans don’t have a fixed repayment schedule like traditional loans. However, it’s essential to understand the interest accrual and its impact on your cash value and death benefit.

Consequences of Taking a Loan

Effects on policy death benefit

Unpaid policy loans (principal and interest) will reduce the death benefit. If you pass away before repaying the loan, the death benefit paid to beneficiaries will be the original amount minus the outstanding loan.

Impact on cash value growth

Since you’re borrowing against the cash value, its growth potential can be hindered. The cash value will be reduced by the loan amount, and the interest charged on the loan can further affect growth.

Tax implications

While policy loans are generally tax-free, if a policy lapses with an outstanding loan, it could become taxable. Always consult with a tax professional when considering the implications of a policy loan.

Policy lapse risks due to unpaid loans

If the loan amount plus accrued interest exceeds the cash value, it can cause the policy to lapse, potentially resulting in tax liabilities.

Managing and Repaying Your Loan

Strategies for timely loan repayment

  • Set up a regular repayment schedule, even if it’s not required.
  • Allocate any policy dividends towards loan repayment.
  • Monitor the cash value regularly to ensure it’s not approaching the loan amount, which can lead to a lapse.

Making interest-only payments vs. paying down principal

You can choose to make interest-only payments, which will prevent the loan from increasing but won’t reduce the principal. Alternatively, paying down the principal will reduce the loan faster and restore more of the death benefit and cash value.

Understanding policy loan interest compounding

Interest on policy loans is often compounded annually. This means that you’re charged interest on both the principal and any previously accrued interest. It’s crucial to understand this compounding effect as it can accelerate the growth of your loan over time.

Case Studies and Examples

Real-life scenarios of borrowing from universal life policies

Scenario 1: John, 45, took a policy loan of $20,000 to fund his daughter’s college tuition. He didn’t repay the loan immediately, and after five years, with an interest rate of 6%, his loan grew to $26,800. While he benefited from immediate liquidity, he now needs to manage the increased loan amount to prevent policy lapse and reduced death benefit.

Scenario 2: Maria, 50, borrowed $10,000 from her policy to cover medical expenses. She started repaying $200 per month, ensuring that the loan was repaid in a few years, with minimal impact on her policy’s cash value and death benefit.

Benefits realized from taking policy loans

  • Immediate access to funds during emergencies.
  • No need for credit checks or loan approvals.
  • Potentially tax-free borrowing.

Challenges faced and lessons learned

  • Interest accumulation can grow the loan faster than anticipated.
  • Unmanaged loans can risk policy lapse.
  • Death benefits can be significantly reduced if loans aren’t managed or repaid.

Alternatives to Policy Loans

Withdrawals from your policy

Instead of a loan, you can opt for a partial withdrawal, which reduces both the cash value and death benefit permanently. It’s a way to access funds without the need to repay.

Surrendering the policy

If you no longer need the policy, surrendering it will give you access to the cash surrender value. However, this terminates the insurance coverage, and there may be tax implications.

External loans or other financial instruments

Personal loans, credit cards, or home equity loans might be alternatives to consider. Each comes with its own pros and cons, so it’s essential to compare and understand the implications.

Pros and cons comparison

Method Pros Cons
Policy Loan Quick access, no credit checks, potentially tax-free. Reduces death benefit, can lead to policy lapse if not managed.
Policy Withdrawal No need to repay, direct access to cash value. Reduces both cash value and death benefit, potential tax implications.
External Loan Doesn’t impact life insurance policy, can offer larger loan amounts. Requires credit checks, potential interest and fees, doesn’t offer the tax advantages of a policy loan.

FAQs on Borrowing from Universal Life Insurance

Common questions and comprehensive answers

Is the interest on a policy loan tax-deductible?
No, the interest on policy loans is not tax-deductible.
What happens if I can’t repay my policy loan?
If the loan isn’t repaid, the interest will continue to accumulate, and the loan amount will be deducted from the death benefit when the insured passes away. If the loan plus interest surpasses the cash value, the policy can lapse.
Can I take multiple policy loans?
Yes, you can take multiple loans, but it’s essential to monitor the combined impact on the cash value and ensure the policy doesn’t lapse.


Borrowing from a universal life insurance policy offers financial flexibility. However, understanding the dynamics of such loans, their impact on the policy’s cash value and death benefit, and the potential risks involved is crucial. Always consult with professionals and make informed decisions.


Glossary of terms

Cash Value:
The savings component of a universal life insurance policy that grows over time.
Policy Loan:
A loan taken against the cash value of a universal life insurance policy.
Death Benefit:
The amount payable to beneficiaries upon the death of the insured.

Universal Life common questions

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