IUL policy loans and withdrawals: mechanics, interest, effect on cover and how they differ from premium financing

Definition: three ways to take or borrow money from a policy

A Policy Loan is a borrowing by the policy owner from the insurer, based on the value of the owner's own policy, with the insurer as creditor. The LIA consumer guide puts it this way: as long as the policy has a cash value, the owner can apply to the insurer for a loan, the insurer charges interest on the loan, and some plans do not offer this feature. A Partial Withdrawal takes money directly out of the account value and does not create a debt. Premium Financing is borrowing outside money from a bank or other institution to pay premiums, and the policy is often assigned to the lender as security. The three are frequently confused, and they differ as follows:

Whether loans or withdrawals are offered, and the limits, rates and charges, are for the product summary and policy contract to say.

How a policy loan works: conditions, limit and rate

The conditions for applying are in the contract: the policy must have enough cash value, and the limit, the minimum loan amount and whether the loan is approved are decided by the insurer under the policy terms. Interest rates are of two kinds: a fixed rate stays unchanged during the contract term, and a variable rate is adjusted to a benchmark as the contract provides; the specific type is for the product summary to say.

What matters more is how the borrowed portion of the account value earns interest afterwards. The U.S. market has several common designs. A U.S. insurer's system help page divides loans into fixed and variable and explains that under a fixed loan the borrowed portion is credited at the same rate as the loan interest rate, so the net cost is close to zero; the industry calls this a wash loan (National Life Group, copyright notice 2014–2022). Another design charges interest at a specified rate while the borrowed portion continues to participate in index crediting; the U.S. AG 49-A defines the rate applicable to the borrowed portion in illustrations (the Policy Loan Interest Credited Rate) and sets a ceiling on it (NAIC, 11 Dec 2025). This design is commonly called a participating loan or indexed loan in the industry, with names varying by company; these are not terms used in the help page cited above. The net cost of the latter design depends on that year's index interest. The following is illustrative (assuming a 5% loan rate, not any product's terms, and excluding the cost of insurance):

The U.S. NAIC's AG 49-A sets a limit here: in an illustration that includes loans, the rate credited on the borrowed portion may exceed the loan interest rate by no more than 50 basis points (and in the alternate scenario may not exceed the loan interest rate). The rule applies to policies sold in the United States; in the background to the guideline, the NAIC explains that one of its purposes is to limit the loan leverage shown in benefit illustrations. The point for readers is that loan results in an illustration depend heavily on the assumption made about the rate credited on the borrowed portion.

Interest capitalisation: what happens if interest is not paid

AG 49-A defines the loan balance to include the outstanding loan principal and loan interest, which means unpaid interest is added to the balance and the next period's interest is charged on the larger base. Singapore products follow their contracts, but the compounding logic is generally the same. The table below is purely arithmetic: loan principal 100, annual interest rate 5%, no repayment.

When the loan balance grows and the account value does not grow in step, the net value from which charges are paid is steadily eroded, and the policy may lapse for want of account value; see Will an IUL lapse on its own. LIA guidance also notes that when a premium is overdue and the grace period has passed, the insurer may, if the cash value is sufficient, advance the premium automatically as a policy loan (an automatic premium loan); the owner pays interest on that loan as well, and some plans do not offer this feature.

Effect on crediting, cost of insurance, the death benefit and the no-lapse guarantee

Partial withdrawals: how they differ from loans, and charges and limits

A withdrawal is not a debt, so there is no interest and no obligation to repay, but the cost is permanent: the account value falls, the sum assured may be reduced in step, and future cost of insurance and sustainability change accordingly. MoneySense notes that a partial withdrawal may attract a charge and reduce the sum assured, while a full surrender ends the cover and may carry a further charge (updated 28 Sep 2026). Free-withdrawal allowances and the years in which withdrawals are available differ by product; for example, the Singlife product page states that from the 6th to the 10th policy year a withdrawal of a stated percentage of the account value may be requested, once per policy year (as at 5 Sep 2024; the product summary prevails). Withdrawals and loans can be combined, but each time you must go back to the contract and check: is there a ceiling, is there a charge, and does it affect the no-lapse guarantee.

How it differs from premium financing, and layering two forms of leverage

When both layers of leverage exist, risk is transmitted step by step: index interest is 0 or low, so account value grows less than expected; the cost of insurance is still deducted, so account value falls; the financing rate rises and the interest burden grows; the lender asks for additional collateral, so the owner is forced to withdraw or borrow to cover the gap; the loan balance grows and erodes the account value further; finally the policy lapses, cover ends and the debt remains.

Regulators and educational bodies give consistent warnings. MoneySense advises considering universal life only if you can pay the premium without borrowing, and warns that if premium financing cannot be repaid, cover may be lost (updated 28 Sep 2026). In Hong Kong, the IA and HKMA issued a circular on 1 Apr 2022, and from 1 Jan 2023 financing applications must be accompanied by a signed Important Facts Statement – Premium Financing; the HKMA consumer page lists risks including interest rate risk, non-guaranteed benefits possibly being lower than illustrated, and limits on exercising free-look rights after assignment (revised 24 Jan 2024). This site's searches found no dedicated MAS or LIA circular on premium financing; in Singapore the practice is handled mainly by banks under their internal credit policies and MAS's general fair dealing requirements. Whether a policy is accepted as collateral, and the loan ratio and rate, are decided case by case by the lender, which may decline to roll over the loan or call for additional collateral. For financing platforms and process, see the iul.sg premium financing page.

Checklist before using policy value

1. Does the contract allow loans, and what are the application conditions, the limit and the minimum loan amount?
2. Is the loan rate fixed or variable, and what are the adjustment rules and notice arrangements?
3. How does the borrowed portion earn interest: at the fixed account rate, as a wash loan, or by continuing to participate in the index?
4. How is unpaid interest treated, is it capitalised, and how often does a warning trigger?
5. Does a loan or withdrawal affect the no-lapse guarantee, and must premiums be topped up first?
6. Are there free-withdrawal allowances, term limits and charges?
7. Has the policy been placed under a trust nomination, and whose consent is needed before borrowing?
8. Are financing and assignment involved, and what does assignment do to the nomination and free-look rights?

If you would like the loan and withdrawal terms of a particular policy interpreted in light of your own circumstances, you can register your needs through the contact details on this site.