Cash Value Life Insurance Loans

Permanent life insurance — whole life (WL), IUL, variable universal life (VUL) — accumulates cash value as premiums are paid in. If you have overfunded a policy to maximize cash-value growth (sized carefully to stay under the modified endowment contract (MEC) threshold of IRC §7702A, “Modified endowment contracts”), the accumulated cash value can be borrowed against on terms no commercial lender will match:

• No credit check, no underwriting. The carrier already controls the collateral; the loan is functionally an advance against the policy’s reserve.
• No fixed repayment schedule. Carry the loan indefinitely. Unpaid interest accrues to the balance and reduces the eventual death benefit, but no payment is required.
• Rates well below commercial credit. “Wash” loans (where the carrier credits the collateralized cash value at the same rate it charges on the loan) net to zero cost; non-wash loans typically run 1%–3% net.
• Tax-free access. A policy loan is not a taxable distribution as long as the policy stays in force. The underlying cash value continues to grow tax-deferred inside the policy.

The catch is structural: this strategy only works if you hold the right kind of policy, sized correctly, and keep it in force for life. Lapsing a policy with an outstanding loan converts the loan balance into ordinary income retroactively — the “phantom income” problem that has destroyed more than one retirement plan when a policy was surrendered or fell into a grace-period collapse. Borrowing against a CVLI policy is a strategy you commit to at policy issue, not a tactic you adopt after the fact.

In estate planning, CVLI loans fund retirement income, pay estate taxes on the insured’s death (via the death benefit, with the loan repaid from policy proceeds), or bridge liquidity between asset sales. The strategy is not a justification for buying a policy you would not otherwise own — the cost-benefit math of acquiring permanent insurance specifically to borrow against it rarely pencils. See section “Life Insurance Workaround” for the underlying policy mechanics.