An IUL policy loan is borrowing from the insurer using available policy value as collateral. It accrues interest and reduces the net value and death benefit available under the contract. Some loan options retain indexed-crediting participation; others use a different credited rate or account. Borrowing is not unlimited, and unpaid debt can contribute to lapse. Tax treatment depends on the contract, MEC status, and what happens later.
In this guide
Are you withdrawing money or borrowing against it?
A withdrawal removes value under the policy's withdrawal provisions. A loan creates indebtedness secured by policy value. Those transactions can affect benefits, future values, and tax calculations differently. Do not treat the two as interchangeable just because both can provide money to the owner.
The insurer calculates available loan value after applying its rules, including any reserve for interest or deductions. The death benefit shown on the policy cover is not the amount you can borrow. Early surrender charges and limited accumulated value can leave little or no available borrowing capacity.
National Life Group's loan explanation describes collateral, loan interest, and reduced net benefits. Its operational limits and processing details apply to its own products; they are not universal features or evidence of availability through JFZ.
How is interest charged?
The contract specifies the loan rate or how it is determined, when interest accrues, and when it is due. A rate can be fixed or variable depending on the option. Ask whether unpaid interest is added to the loan balance and how that affects the amount owed in later years.
For a simple invented example, a $10,000 loan at 5% annual interest would generate $500 over a full year under simple annual arithmetic. If that amount is added to principal, the balance becomes $10,500 before subsequent interest. Actual policies may accrue daily, bill on policy anniversaries, or apply different terms. This is not a quoted loan rate.
A policy may not require conventional monthly loan repayments, but the economic cost remains. A growing balance can reduce benefits or strain the policy. Ask the insurer how to label a repayment so it is applied to the loan rather than treated as a new premium.
What are participating and nonparticipating loans?
Under a participating loan arrangement, value supporting the loan may remain eligible for indexed credits under specified rules. The interest charged on the loan and the interest credited to the policy are separate calculations. A positive difference is possible in an illustration, but is not a guaranteed profit.
Under a nonparticipating or standard arrangement, collateral may move to a loan account or receive a specified crediting treatment rather than the ordinary indexed strategy. Names and mechanics differ by carrier. Ask exactly where collateral is accounted for, what it earns, and which charges still apply.
On smaller screens, scroll the table to compare every column.
| Feature to compare | Question for the insurer |
|---|---|
| Loan charge | Is the rate fixed, variable, current, or guaranteed? |
| Collateral credit | Does it retain indexed participation or receive another rate? |
| Timing | When are credits posted and interest charged? |
| Changes | Can the loan type change, and under what conditions? |
| Limits | How much can be borrowed while leaving required values? |
Never assume that an illustrated credited rate above the loan rate will occur every year. A period with no indexed credit can still incur loan interest and insurance charges. That combination is particularly important when borrowing is expected to continue for many years.
How do loans affect the death benefit and surrender value?
Outstanding indebtedness generally reduces the net amount payable on a covered death. It can also reduce the amount available on surrender. The statement may still display a gross face amount or accumulated value, so ask for the net figures after the loan and accrued interest.
For a simplified example, a gross benefit of $200,000 with $30,000 of deductible policy indebtedness would leave $170,000 before any other contract adjustments. The example illustrates subtraction, not a claim determination. Your contract may include additional provisions that change the calculation.
Before borrowing, revisit why the insurance was purchased. If beneficiaries need the full original benefit for a mortgage or care obligation, a loan may undermine that goal. Compare the proposed access with the protection that would remain, not just the cash received today.
Why can a loan contribute to lapse?
Insurance charges continue while a loan is outstanding. If policy value and funding are insufficient to meet continuation requirements, coverage can lapse. Lower credits, increasing costs, missed premiums, repeated loans, and capitalized interest can interact. A policy that looked durable under one illustration may not remain so under actual experience.
Ask for in-force scenarios showing the proposed borrowing, lower crediting, and a plan to pay interest or reduce loans if needed. Read any overloan-protection provision carefully; eligibility, costs, benefit reductions, and activation rules can apply. Do not assume an optional rider removes every borrowing risk.
If the insurer sends a lapse or additional-premium notice, respond promptly. Obtain the amount, deadline, and available options directly from the insurer. Waiting for an annual review can be inappropriate when a notice requires action sooner.
Are policy loans taxable?
Loans from a qualifying non-MEC life insurance contract are generally not treated as taxable income while the policy remains in force under applicable rules. That is not a universal promise of tax-free income. MEC status, surrender, lapse, exchanges, and individual circumstances can change the result.
For a MEC, loans can be treated as distributions and taxed to the extent of gain under the applicable rules. Section 72 also provides an additional tax on certain taxable MEC distributions before age 59½, with exceptions. See the official distribution rules in section 72 and our MEC explanation.
Lapse or surrender with an outstanding loan can produce taxable income even when little or no new cash is received at that time. Ask the insurer for its basis, debt, and gain information and consult a qualified tax professional before the transaction. The IRS surrender guidance explains the general treatment of proceeds exceeding policy cost; debt can complicate the calculation.
What should you request before borrowing?
Get the current statement, net loan availability, rate terms, MEC status, tax basis information, and an in-force illustration. Record the planned amount, purpose, repayment approach, and minimum death benefit you want preserved. Ask what would happen under a lower-credit scenario and how frequently the plan should be reviewed.
JFZ can help organize a policy review and questions for the issuing insurer. It cannot establish a loan rate or tax outcome from an educational article. A sensible review evaluates immediate access, ongoing funding, beneficiary protection, and the consequences if the original assumptions do not occur.
HOW JFZ CAN HELP
Request a policy review before borrowing
Every family’s situation is a little different, and that is where we come in. Bring the questions from this guide to a JFZ agent and we will walk through your life insurance coverage options options together, in plain language and at your pace.
Request a policy review before borrowing An inquiry starts a discussion. It is not an instant quote, application, approval, or authorization to change existing coverage.General education only. Insurance availability, benefits, rates, and eligibility vary by state, carrier, product, age, and underwriting. Contract terms control. Consult qualified advisers about personal tax or legal questions.
Sources & further reading (3)
Prepared September 24, 2026. Carrier examples do not establish product availability through JFZ; contract and state requirements vary. Tax discussion is general education.
