What Is the Maximum Loan From a Variable Universal Life Policy?

Variable Universal Life (VUL) insurance policies offer a blend of life insurance protection and an investment component, providing flexibility in premiums and potential for cash value growth. Policyholders can allocate premiums to various investment sub-accounts, similar to mutual funds, enabling tax-deferred growth of the cash value. VUL policies offer lifelong coverage, provided sufficient premiums are paid to maintain the policy. A key feature is the ability to access accumulated cash value through policy loans.

Understanding Variable Universal Life Policy Loans

A Variable Universal Life policy loan is a way for policyholders to access the accumulated cash value within their policy. This is not a withdrawal, but a loan taken against the policy’s cash value, with the policy serving as collateral. The insurance company charges interest on the loan, which can vary but is often competitive compared to other personal loans, frequently ranging between 5% and 8%.

Even with a loan, the full cash value generally continues to be invested in chosen sub-accounts or a fixed account. However, the credited interest rate on the loaned amount might be lower than the rate earned on the unborrowed portion. Unlike a withdrawal, where funds are permanently removed, a loan keeps the policy intact. There is no set repayment schedule, offering flexibility, though interest accrues on the outstanding balance.

Determining the Maximum Loan Amount

The maximum loan amount from a Variable Universal Life policy is determined by its cash surrender value. Insurers allow policyholders to borrow a percentage of this value, often 90% to 95%. The cash surrender value is the amount available if the policy were terminated, accounting for any surrender charges and outstanding loan balances.

Several factors can reduce the available loan amount. Existing outstanding loans against the policy will decrease the amount that can be borrowed. Surrender charges, fees applied if a policy is surrendered or a loan is taken during its early years, also reduce the accessible cash value. Insurance companies may also impose minimum cash value requirements that must remain in the policy after a loan, ensuring the policy can cover its ongoing costs.

Market fluctuations directly impact a VUL policy’s cash value, as sub-accounts are invested in market-based securities. If investments perform poorly, the cash value can decrease, reducing the maximum available loan amount. The potential loan amount is not static but subject to the performance of the underlying investments.

Impact of Policy Loans on Your VUL Policy

Taking a loan from a VUL policy has several implications for its performance and benefits. The borrowed portion of the cash value affects how that segment of the policy grows. While unborrowed cash value continues to be invested in chosen sub-accounts and earns market-linked returns, the loaned amount may be moved to a fixed account or earn a lower interest rate. This can reduce overall cash value growth compared to a policy with no outstanding loans.

The VUL policy’s death benefit is directly affected by an outstanding loan. Any unpaid loan balance, including accrued interest, will reduce the death benefit paid to beneficiaries. Beneficiaries would receive a lower payout than the stated death benefit amount. Loan interest accrues daily on the outstanding balance, and if not paid, it is added to the principal, causing the loan to compound.

A risk with VUL policy loans is the potential for the policy to lapse. If the outstanding loan balance, including accrued interest, grows to exceed the policy’s cash surrender value, the policy may no longer have sufficient funds for monthly deductions and insurance charges. If the policyholder does not make additional payments to restore cash value, the policy could lapse, resulting in loss of coverage and potential tax implications if the loan amount exceeds premiums paid.

Requesting a Policy Loan

Requesting a policy loan from a Variable Universal Life policy involves a direct process with the insurance company. The first step requires contacting the insurer’s customer service department or a policy service center. Policyholders then complete a specific loan request form provided by the company.

This form requires details like the desired loan amount and verification of policyholder information. Have your policy number readily available and confirm your identity. Once the form is submitted and processed, loan proceeds are disbursed to the policyholder. Common disbursement methods include direct deposit or a physical check. Processing time can vary but often takes several business days to a week.