Universal Life Insurance Loan: How to Borrow Against Your UL Policy

By Life Credit Company | Updated March 2026 | Borrowing Against Life Insurance

Universal life insurance — commonly called UL — gives policyholders a lot of flexibility. Flexible premiums, adjustable death benefits, and a cash value account that grows over time. That cash value makes UL policies eligible for policy loans. But there are some important differences between borrowing against a UL policy versus a traditional whole life policy that you need to understand before you proceed.

What Makes Universal Life Insurance Different?

Unlike whole life insurance — where premiums are fixed and cash value grows at a guaranteed rate — universal life policies have several moving parts:

• Flexible premiums: You can pay more or less than the base premium amount within certain limits
• Adjustable death benefit: You can increase or decrease the face amount under certain conditions
• Variable cash value growth: The credited interest rate changes annually based on the insurer's declared rate (usually tied to market conditions), with a guaranteed minimum

This flexibility is valuable — but it also introduces complexity when it comes to borrowing. Because the cash value can fluctuate, so can your borrowing capacity.

Types of Universal Life Insurance and Loan Implications

Traditional Universal Life (UL)

Cash value earns interest at a rate declared annually by the insurer. The rate is based on portfolio performance and market conditions. There's typically a guaranteed minimum (often 2%–3%). Policy loans are available, and the loan rate may be fixed or variable.

Indexed Universal Life (IUL)

Cash value growth is linked to a stock market index (such as the S&P 500), subject to a cap (maximum growth) and a floor (typically 0% — you don't lose value in a down market). IUL policies are increasingly popular because they offer market upside with downside protection. Policy loans work similarly to traditional UL.

Variable Universal Life (VUL)

Cash value is invested in sub-accounts similar to mutual funds. The value can grow significantly — or drop significantly. This creates more risk for policy loans because your cash value (and thus borrowing limit) can decrease in a market downturn, potentially threatening the policy if a loan is outstanding.

How Policy Loans Work on a UL Policy

The mechanics are the same as with any permanent life insurance policy loan:

1. You request a loan from your insurer using your accumulated cash value as collateral
2. No credit check or income verification required
3. You can borrow up to 90% of the current cash value
4. Interest accrues on the outstanding balance
5. No mandatory repayment schedule — but unpaid interest adds to the loan balance
6. If the loan balance exceeds the cash surrender value, the policy lapses

For the full step-by-step process, see our Life Insurance Loan Process Guide.

Interest Rates on Universal Life Policy Loans

UL policy loan rates vary more than whole life loan rates. You'll typically see:

• Fixed-rate loans: A set rate (usually 5%–8%) written into the policy. More predictable.
• Variable-rate loans: A rate that adjusts annually. Can start low and increase over time.
• Participating loans: Some IUL policies allow the cash value to continue earning index credits even while serving as collateral — reducing the net cost of borrowing.

Variable-rate loans carry more risk than fixed-rate loans. If rates rise significantly, you could find yourself paying more in interest than anticipated. Always check your specific policy's loan provisions.

The Lapse Risk: Why UL Loans Are More Dangerous Than Whole Life Loans

This is the critical issue with UL policy loans — and the one most policyholders underestimate.

With whole life insurance, the cash value grows at a guaranteed rate, regardless of what happens in the market. This provides a predictable buffer against an outstanding loan balance growing to threaten the policy.

With UL insurance, the cash value growth rate can drop. If you're holding a loan on a UL policy and interest rates fall (reducing the credited rate), your cash value may grow slower while your loan balance continues to accrue interest. The gap between your loan balance and cash value can close faster than you expect.

This risk is compounded by the flexible premium structure of UL policies. Some policyholders underperform on premiums — paying less than the recommended amount — which also slows cash value growth. Combine underfunding with an outstanding loan, and a policy can lapse years earlier than projected.

If you have an outstanding loan on a UL policy, do these three things:

1. Review your annual policy statement and check the current loan balance
2. Ask your insurer for an in-force illustration showing projected cash value vs. loan balance over time
3. Pay at least the annual interest each year — don't let it compound

Withdrawals vs. Loans on a UL Policy

UL policies offer something that most whole life policies don't: the ability to make partial withdrawals from cash value (not just loans). It's worth understanding the difference:

• Policy loan: Funds are borrowed and can theoretically be "repaid." The cash value remains as collateral. Interest accrues. If repaid, the death benefit is restored.
• Partial withdrawal: Funds are permanently removed from cash value. The death benefit and cash value are permanently reduced. No repayment is possible. May be tax-free up to the cost basis.

For most situations, a loan is preferable to a withdrawal because it preserves the option to restore the death benefit by repaying. But for smaller amounts when you don't plan to repay, a withdrawal may be simpler. See our full comparison: Life Insurance Loan vs. Withdrawal.

When to Consider a UL Policy Loan

• You need short-term liquidity and have a clear repayment plan
• You want to avoid triggering taxes by pulling from retirement accounts
• The net cost of borrowing (after credited interest) is lower than other available financing
• You've reviewed an in-force illustration and confirmed the policy can sustain the loan without lapsing

For Seriously Ill UL Policyholders

If you're facing cancer or another serious illness and need access to larger amounts than your UL cash value supports, a Living Benefit Loan may be a better path. These programs lend against the death benefit value of your policy — not just the cash value — which can unlock significantly more liquidity.

Life Credit connects qualifying patients with providers who offer Living Benefit Loans. Policies valued at $100,000 or more may qualify. Learn how it works or contact us today.