{"id":10323,"date":"2022-01-27T11:31:18","date_gmt":"2022-01-27T16:31:18","guid":{"rendered":"https:\/\/www.figmarketing.com\/blog\/?p=10323"},"modified":"2025-02-17T09:38:54","modified_gmt":"2025-02-17T14:38:54","slug":"how-life-insurance-loans-work","status":"publish","type":"post","link":"https:\/\/www.figmarketing.com\/blog\/how-life-insurance-loans-work\/","title":{"rendered":"How Life Insurance Loans Work"},"content":{"rendered":"\n

Updated August 7, 2024, at 1:30 PM<\/em><\/p>\n\n\n\n

Loans from cash value life insurance<\/a><\/strong> can provide tax-free income if the policy isn\u2019t a modified endowment contract (MEC)<\/a><\/strong> and stays in force until death.<\/p>\n\n\n\n

Income will vary depending on many factors, including crediting rates, loan rates, insurance costs, and the type of loan or loan features the policy has associated with it.<\/p>\n\n\n\n

When you take a loan against an in-force policy, you\u2019re not withdrawing the money from the policy itself. You\u2019re taking a loan that the carrier is issuing to you and the carrier is using your policy cash value as collateral.<\/p>\n\n\n\n\n\n\n\n

Any policy loan will also reduce the net death benefit. The loan may have a level interest rate or a variable interest rate. The policy may also allow for the cash value that secures the loan to remain invested in index segments, while other policies may require the cash value securing the loan to be moved into a fixed account.<\/p>\n\n\n\n

Fixed Account Loans<\/strong><\/h2>\n\n\n
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\"Life<\/a><\/figure><\/div>\n\n\n

These loan types require the policy cash value<\/a><\/strong> that\u2019s securing the loan amount to be moved out of any indexed segments and into a fixed account.<\/p>\n\n\n\n

Carriers determine two rates associated with fixed loans: the loan interest rate and the fixed account crediting rate. The loan interest rate is the carrier\u2019s rate on the money they loan you. The fixed account crediting rate is the interest rate the carrier credits to the money held in the fixed account as collateral for the loan.<\/p>\n\n\n\n

Many policies will have a \u201cwash loan rate\u201d after about ten years where these two rates are equal, but not all policies offer this provision or guarantee this.<\/p>\n\n\n\n

Related: IUL vs. GUL: Which Makes the Most Sense?<\/a><\/h4>\n\n\n\n

Example<\/h3>\n\n\n\n

Look at an example with an indexed universal life<\/a><\/strong> policy with a level death benefit of $300,000 and a cash value of $200,000.<\/p>\n\n\n\n

Here\u2019s what happens with a $100,000 fixed loan at a 5% interest rate and 5% crediting rate for a net-zero cost \u201cwash loan\u201d over a one-year period prior to policy charges being accounted for. Remember, not all policies may offer a wash loan provision:<\/p>\n\n\n\n