Can You Take Money Out of an IUL Before Retirement?

You’re 52.

You’ve been putting money into an indexed universal life policy for several years.

Retirement is still more than a decade away.

Then something happens.

You need $40,000.

Maybe you’re helping with a child’s wedding.

Maybe you’re buying a rental property.

Maybe your business needs cash.

Maybe the roof, air conditioner and car somehow decide to die in the same month.

And now you’re wondering:

“Can I actually get to the money in my IUL, or is it locked up until retirement?”

Yes, an IUL can potentially provide access to available policy values before retirement.

But there are different ways to access money.

And the way you take it out can matter.

A lot.

Your IUL Isn’t a Retirement Account With an Age 59½ Door on It

One reason people consider cash-value life insurance is that access to policy values works differently from access to a traditional qualified retirement account.

You’re not simply waiting for a specific retirement age before the policy can potentially provide access to available values.

But that does not mean:

“I can take any amount I want whenever I want with no consequences.”

The policy has to have sufficient available value.

The method of access matters.

The policy’s tax classification matters.

Outstanding loans matter.

And whatever you do today can change what the policy is able to do 10, 20 or 30 years from now.

There Are Two Basic Ways People Talk About Taking Money From an IUL

The two terms you’ll hear most often are:

Withdrawals.

And:

Policy loans.

People sometimes use those words as if they’re interchangeable.

They’re not.

What Is an IUL Withdrawal?

A withdrawal removes value from the policy according to the policy’s terms.

You’re actually taking money out.

That can reduce policy values and may reduce the death benefit.

Tax treatment can also be affected by factors including your cost basis, the amount withdrawn, whether the policy is a Modified Endowment Contract, and other applicable tax rules.

That’s why I don’t want someone saying:

“Just withdraw whatever you need. It’s tax-free.”

That’s too broad.

What Is an IUL Policy Loan?

A policy loan works differently.

You’re borrowing against the policy under the terms of the insurance contract.

The loan is real indebtedness.

It has a cost.

It can affect available policy values.

It generally reduces the net death benefit if it remains outstanding when you die.

And large amounts of indebtedness can increase the risk that the policy eventually becomes unsustainable.

So:

Loan does not mean free money.

Can You Borrow From an IUL at Age 45, 50 or 55?

Potentially, if sufficient loan value is available under the policy.

There isn’t a universal rule that says you have to wait until retirement age before a policy loan can be taken.

But I wouldn’t make the decision based only on whether the insurance company allows the loan.

I’d ask:

“What does taking this loan today do to my policy later?”

That’s the better question.

Available Doesn’t Mean You Should Take It

Imagine you have access to $100,000 of policy value.

That doesn’t automatically mean borrowing $100,000 is a good idea.

Maybe the policy could technically process the loan.

But what happens to:

• Future cash value?
• Future loan capacity?
• Policy charges?
• Projected retirement distributions?
• Policy durability?
• Net death benefit?

Those questions matter more than the maximum amount you can get today.

Here’s the Question Most People Are Really Asking

When someone asks me whether they can access an IUL early, what they’re usually worried about is liquidity.

They’re thinking:

“I don’t want to put all this money somewhere and then find out I can’t touch it for 15 years.”

That’s reasonable.

But liquidity has two sides.

Can you access the money?

And:

What does accessing it cost you?

You need both answers.

Early Policy Values Matter

An IUL is life insurance.

Policy charges and surrender provisions can make early-year economics very different from later-year economics.

So don’t assume:

“I contributed $50,000, so I have $50,000 available to take out.”

That isn’t necessarily how the policy works.

Before funding an IUL, I want to see the early policy values.

Year 1.

Year 2.

Year 3.

Year 5.

Then ask:

“If something happens and I need money during these years, what is actually available?”

Why Emergency Savings Still Matter

I don’t think an IUL should be an excuse to keep no cash outside the policy.

If every dollar of your available savings is being pushed into a long-term life insurance strategy, you can create unnecessary pressure.

You still need liquidity.

You still need money for emergencies.

You still need room for life to go sideways.

Because if you have to raid a long-term strategy every time something unexpected happens, the original retirement projection can become meaningless.

Now Here’s Where the IUL JUMP Strategy Makes This More Interesting

With the IUL JUMP Strategy, policy loans can appear during the accumulation phase.

But those loans have a very different purpose from borrowing $50,000 to buy a boat.

This distinction is critical.

A Matching Indexed Participating Loan Is an Actual Policy Loan

The Matching Indexed Participating Loan used in the JUMP Strategy is not a free contribution.

It isn’t a bonus.

It isn’t the insurance company giving you extra money that never has to be accounted for.

It’s an actual policy loan.

But here’s the key difference:

The loan proceeds are immediately redeployed into the same policy as additional funding.

They aren’t taken outside the policy and spent.

Compare That With Borrowing $50,000 to Buy a Boat

Let’s make the difference obvious.

You take a $50,000 policy loan.

Then you spend $50,000 on a boat.

The money has left the strategy.

You have the boat.

The policy has the associated indebtedness.

Those borrowed dollars aren’t sitting inside the policy participating in the applicable indexed-crediting strategy anymore.

That’s very different from a JUMP loan.

What Happens With a JUMP Loan?

The loan is created.

But instead of sending the proceeds to your checking account so you can spend them, the proceeds are redeployed into the policy as additional funding.

That’s why I like explaining JUMP with two conceptual buckets.

Bucket One: the client’s own contributed money.

Bucket Two: Matching Indexed Participating Loan money that has been borrowed and redeployed.

Under the indexed strategy we’re discussing, both buckets have the same indexed-crediting potential, subject to the applicable 10% cap and 0% indexed-crediting floor.

The second bucket also carries the applicable policy-loan cost.

Here’s the $10,000 JUMP Example

Suppose the client contributes $10,000 per year.

By Year 11 in this example:

$10,000 is coming from the client.

$50,000 is coming from the Matching Indexed Participating Loan.

That creates $60,000 of total annual funding shown in the example.

But the additional $50,000 hasn’t been taken out and spent.

It has been redeployed into the policy.

Why That Distinction Matters for Early Access

Suppose you’re at the $30,000 Matching Indexed Participating Loan level.

Then you decide you need another $50,000 personally.

You cannot simply look at the JUMP illustration and think:

“The strategy already uses loans, so another loan won’t matter.”

It can matter substantially.

The JUMP loans were modeled with the proceeds remaining inside the strategy.

Your $50,000 personal loan is leaving.

Those are different economics.

The JUMP Loans Also Don’t Disappear

Each later JUMP doesn’t simply pay off the earlier Matching Indexed Participating Loans.

The policy indebtedness accumulates.

So before taking additional money outside the policy, I want to know how much indebtedness already exists.

Then add the proposed personal loan.

Then rerun the policy.

What Does the JUMP Loan Cost?

With the policy structure we currently use for the IUL JUMP Strategy, the applicable loan rate is currently 5%, with a contractual maximum loan rate of 6% for the applicable loan feature.

The current 5% rate is not the same as saying the rate is guaranteed to remain 5%.

During the JUMP accumulation design, the strategy is modeled with the applicable loan charges carried forward rather than requiring the client to pay those charges out of pocket each year.

That doesn’t make the cost disappear.

It remains part of the policy economics.

Why Does Redeploying the JUMP Loan Potentially Help?

Because the borrowed-and-redeployed dollars continue to have indexed-crediting potential under the applicable indexed strategy while the corresponding loan carries its cost.

If the credited result exceeds the loan cost, there can be positive economic spread.

If the credited result is below the loan cost, the spread can be unfavorable.

Positive arbitrage isn’t guaranteed.

The 6.87% Historical Indexed-Crediting Example

One historical analysis we’ve used examines annual S&P 500 price changes from 2006 through 2020.

Dividends are excluded because the policy isn’t directly invested in the S&P 500 and doesn’t receive the index’s dividends.

The example applies the strategy’s 10% cap and 0% indexed-crediting floor.

Negative annual price changes are treated as 0% for purposes of the indexed-crediting calculation.

Positive annual price changes above 10% are limited to the 10% cap used in the example.

Under those assumptions, the historical period produced a 6.87% average indexed-crediting result.

That’s not the historical return of the S&P 500.

It isn’t a guaranteed policy return.

And it isn’t a prediction of future policy performance.

The 1.87% Modeled Positive Spread

Using the 6.87% historical indexed-crediting example and the current applicable 5% loan rate:

6.87% – 5.00% = 1.87 percentage points of modeled positive spread.

That’s the economic idea behind the modeled positive arbitrage.

But now imagine a 0% indexed-crediting period.

If the applicable loan cost remains 5%, you have unfavorable loan economics for that period.

That’s why I don’t treat borrowed money like free money.

What Happens When You Spend the Borrowed Money?

This is the piece I really want you to understand.

With the Matching Indexed Participating Loan, the proceeds are redeployed.

With a personal consumption loan, the money leaves.

If you borrow $50,000 and spend it, that $50,000 isn’t sitting inside the policy waiting for future indexed crediting.

You still have the associated indebtedness.

So when you’re considering early access, don’t ask only:

“What is the loan rate?”

Ask:

“What happens to the long-term opportunity when this money leaves the policy?”

Should You Pay the Loan Interest Out of Pocket?

For money borrowed and spent outside the policy, I want the loan-management strategy evaluated separately from the accumulation-phase JUMP design.

Servicing some or all of the loan cost may make sense in certain scenarios because the borrowed money is no longer working inside the policy.

What I don’t want is a blanket statement:

“You never have to pay the interest.”

That’s not how I would evaluate a long-term retirement strategy.

Show me the loan.

Show me the cost.

Show me what happens if it isn’t serviced.

Then decide.

Can an IUL Loan Be Used for Anything?

Policy-loan proceeds generally aren’t limited to retirement spending in the way people often think of retirement-plan distributions.

Someone might access policy values for:

• A home purchase
• A business opportunity
• College expenses
• A major emergency
• A vehicle
• Travel
• Retirement expenses

But the fact that you can use money for something doesn’t answer whether you should.

The policy still has to survive the decision.

Could You Use an IUL Loan for a House Down Payment?

Potentially, if sufficient loan value is available under the policy and the transaction is permitted under the contract.

But if you take $100,000 out of the policy at 50 for a house and your retirement illustration assumed that money would remain part of the policy economics, you need a new retirement projection.

Don’t keep using the old one.

Could You Use It to Start a Business?

Again, access may be available.

But now you’re moving retirement resources into a business venture.

Maybe the business does incredibly well.

Maybe it doesn’t.

The IUL doesn’t know why you borrowed the money.

The policy still has to account for the loan.

What About College?

Some people like the idea of building policy value they can potentially access for education expenses.

Fine.

But if retirement is also one of the goals, model both.

What happens if $25,000 per year leaves the policy for four years of college?

Does retirement income fall?

How much?

Does the policy remain durable?

What happens to the net death benefit?

Those are answerable questions.

Withdrawals and Loans Can Have Different Tax Consequences

This is why I don’t use “tax-free” as a blanket description of taking money from an IUL.

For a properly structured and maintained non-MEC policy, withdrawals up to basis and policy loans may potentially provide access to policy values without current income taxation under current federal rules, subject to applicable requirements and the policy remaining in force.

But basis matters.

MEC status matters.

Lapse matters.

Surrender matters.

The way you access the money matters.

That’s why tax treatment should be evaluated before taking a large distribution.

What If the Policy Is a MEC?

A Modified Endowment Contract has different federal tax rules for distributions.

That’s a major reason MEC status matters when someone intends to use policy value during life.

Don’t assume that because two policies are both IULs, taking $50,000 from each one creates the same tax result.

The policy’s tax classification matters.

What If You Borrow Too Much?

Then early liquidity can turn into a later durability problem.

Large policy loans can reduce available policy values.

Outstanding indebtedness generally reduces the net death benefit.

And excessive indebtedness can increase lapse risk.

So I don’t like this question:

“What’s the maximum amount I can take?”

I prefer:

“How much can I take while keeping the long-term strategy within acceptable stress-tested ranges?”

What If the Policy Lapses With a Loan?

This is one of the risks that needs to be understood before using policy loans aggressively.

If a policy lapses or is surrendered with gain and outstanding indebtedness, taxable income can potentially result.

That can create an ugly situation.

You took money years ago.

You spent it.

Then the policy later fails.

And now a tax issue appears.

That’s why policy loans need monitoring.

What Happens to an Outstanding Loan When You Die?

Outstanding policy indebtedness generally reduces the net death benefit payable under the policy contract.

So if your policy has a $1 million applicable death benefit at death and substantial outstanding indebtedness, don’t assume your beneficiaries automatically receive the full $1 million.

Look at the projected net death benefit.

Early Access Can Change the Up-to-300% Retirement-Income Comparison

In certain modeled comparisons we’ve evaluated, the IUL JUMP Strategy has produced up to approximately 300% more projected retirement income than the 401(k), Traditional IRA or comparable tax-deferred retirement strategy being evaluated.

But here’s where this article matters.

Suppose that comparison assumes the policy value remains inside the strategy throughout the accumulation period.

Then at age 50, you borrow $150,000 and spend it.

You can’t simply keep pointing at the original retirement-income projection.

The policy changed.

Rerun the math.

How much value left?

How much indebtedness was added?

What loan cost is now being carried?

How much retirement income remains?

Does the policy still survive the same stress tests?

Don’t just believe the 300% number. Make the strategy prove where the difference comes from with the math.

The Same Goes for the Approximately 40% Traditional-IUL Comparison

We’ve also evaluated certain modeled comparisons where the JUMP structure produced approximately 40% more projected retirement income than the traditional IUL structure being compared.

That comparison is based on modeled assumptions too.

If you take substantial money out of one strategy early, rerun both sides before continuing to quote the original result.

Apples to apples.

The 300% Isn’t the Sales Pitch. It’s the Question.

If a retirement projection shows a dramatic advantage, I want to know what creates it.

Then I want to attack the assumptions.

What if you need $50,000 early?

What if you need $100,000?

What if indexed crediting is lower?

What if the loan rate moves from the current 5% to the applicable contractual maximum of 6%?

What if a future JUMP isn’t approved?

What if retirement begins five years earlier?

If the strategy still works within acceptable ranges, now we’ve learned something useful.

Liquidity Is Valuable, but So Is Restraint

Having access to money can make a financial strategy more useful.

But access can also tempt people to treat long-term money like a checking account.

New truck.

Boat.

Vacation.

Kitchen remodel.

Another $20,000 here.

Another $30,000 there.

Ten years later, the policy looks nothing like the original retirement illustration.

The problem wasn’t that the money was accessible.

The problem was pretending access had no cost.

Before You Take Money Out, Ask One Question

“Show me the policy before the withdrawal or loan, and then show me the policy after it.”

Same assumptions.

Same retirement age.

Same longevity.

Same stress tests.

Now compare:

Projected policy value.

Projected retirement income.

Outstanding indebtedness.

Policy durability.

Projected net death benefit.

Now you know what the $50,000 actually cost.

This Matters Even More When You’re Close to Retirement

If you’re 55 and retirement is ten years away, taking $100,000 from the policy isn’t the same decision as taking it at 35.

There is less time for the policy to recover from a major change.

And emotionally, this is where the decision gets harder.

You may be thinking:

“We saved this money. Why shouldn’t we be able to use some of it?”

That’s fair.

Then the other thought shows up:

“What if we mess this up and regret it?”

You don’t want to reach 75 and discover that something you spent at 55 weakened the income you were counting on.

You want to stay independent.

“We should be able to handle this ourselves.”

And you don’t want a depleted retirement strategy forcing your children into the conversation later.

“I don’t want to ask my kids for help.”

That’s why the decision shouldn’t be driven by fear or by the excitement of having money available.

Run the numbers.

How We Evaluate Early IUL Access at FPP Financial

At FPP Financial, we use our Retirement Math Method™.

If you want to take money from an IUL before retirement, I don’t want to answer only:

“Can you?”

I want to answer:

“What happens if you do?”

Show me the current policy value.

Show me the available loan value.

Show me the cost basis.

Show me the MEC status.

Show me existing policy indebtedness.

Show me which JUMPs have already occurred.

Show me the current applicable loan rate.

Then stress-test the applicable contractual maximum.

Now take the proposed money out.

Rerun the policy.

What happens to retirement income?

What happens to policy durability?

What happens if indexed crediting is weaker?

What happens if you live to 95?

What happens to the net death benefit?

Now you can decide whether accessing the money today is worth what it changes tomorrow.

I don’t try to sell you on the strategy. I make the strategy prove itself with the math.

So, Can You Take Money Out of an IUL Before Retirement?

Potentially, yes.

Available policy values may be accessed before retirement through withdrawals or policy loans according to the policy’s terms.

But a withdrawal and a loan aren’t the same thing.

A personal policy loan and a Matching Indexed Participating Loan used inside the JUMP Strategy aren’t economically the same thing either.

If the money leaves the policy and gets spent, it is no longer working inside the policy.

The policy may still carry the associated indebtedness.

That can change future policy values, retirement distributions, net death benefit and policy durability.

So yes, access matters.

But the better question is:

“What does accessing this money today do to my retirement tomorrow?”

Thinking About Taking Money From Your IUL?

Before you take a large withdrawal or policy loan, we can model what it does to the rest of the strategy.

We’ll compare the policy before the distribution with the policy after it.

We’ll look at future values, loan costs, existing JUMP indebtedness, projected retirement income, policy durability and projected net death benefit.

Then you can decide whether the money is worth taking now.

Don’t guess.

Make the strategy prove itself after the money comes out.

Let the math do the talking.

Schedule Your Tax-Free Retirement Strategy Meeting

Explore More

• Are IUL Policy Loans Really Tax-Free?
• What Happens If You Borrow Too Much From an IUL?
• What Is a Matching Indexed Participating Loan?

Disclosure

This material is for educational purposes only and is not intended as individualized investment, tax, legal or insurance advice. Indexed universal life insurance is a long-term life insurance product with policy charges, cost of insurance, surrender considerations, underwriting requirements and other contractual provisions. Access to policy values is governed by the actual insurance contract and the values available at the time of the requested transaction.

Withdrawals and policy loans are different transactions and can have different effects on policy values, death benefits and taxation. Policy loans are actual policy indebtedness, generally accrue applicable loan charges, reduce available policy values and net death benefits, and may increase lapse risk. Withdrawals generally reduce policy values and may reduce death benefits according to the policy terms.

Policy values from a properly structured and maintained non-MEC policy may potentially be accessed through withdrawals to basis and policy loans without current income taxation under current federal rules, subject to applicable requirements. Tax treatment can be affected by cost basis, Modified Endowment Contract status, policy lapse, surrender and other circumstances. A policy that lapses or is surrendered with gain and outstanding indebtedness may create taxable income. Modified Endowment Contracts are subject to different federal tax rules.

Matching Indexed Participating Loans are policy loans, not free contributions, bonuses, guaranteed gains or direct investments in a market index. In the JUMP Strategy described here, Matching Indexed Participating Loan proceeds are modeled as being redeployed into the same policy as additional funding. A policy loan taken outside the policy and spent for personal purposes has different economic consequences because those borrowed proceeds are no longer participating inside the policy.

The JUMP strategy is modeled with applicable loan charges carried forward during the accumulation design rather than requiring the client to pay those charges out of pocket each year. This does not eliminate the economic cost of borrowing or guarantee that policy values will remain sufficient to support policy indebtedness.

References to the $10,000 annual contribution example, JUMP progression, 6.87% historical indexed-crediting example, 1.87 percentage-point modeled positive spread, current 5% loan rate, contractual maximum 6% loan rate, approximately 40% more projected retirement income, or up to approximately 300% more projected retirement income are illustrative and are not guarantees of future policy performance, positive arbitrage, policy durability, funding capacity, non-MEC status, future JUMP approval, net death benefit or retirement income.

The historical 6.87% indexed-crediting example discussed in this article is based on an analysis of annual S&P 500 price changes from 2006 through 2020, excluding dividends, and applying the stated 10% cap and 0% indexed-crediting floor. Historical results do not predict future policy performance. An indexed universal life policy does not directly invest in the S&P 500, does not own the underlying stocks and does not receive index dividends.

A 0% indexed-crediting floor does not guarantee that overall policy value cannot decline. Policy charges, cost of insurance, loan costs and other policy mechanics continue to apply. Positive arbitrage is not guaranteed. Periods in which indexed crediting is below the applicable loan cost can produce unfavorable loan economics.

Future JUMPs and death-benefit increases are subject to carrier approval and applicable medical, financial and other underwriting requirements. Future approval is not guaranteed. Failure to complete a planned future JUMP may materially change projected funding, policy values, indebtedness, death benefits and retirement-income results.

Policy-specific withdrawal provisions, loan provisions, available loan values, loan rates, surrender charges, guarantees, nonguaranteed elements, caps, participation rates, spreads, crediting methods, policy expenses, MEC testing, lapse provisions, death-benefit provisions and other contractual terms should be verified against the current carrier-approved illustration, current in-force information and actual insurance contract. FPP Financial does not provide tax or legal advice. Consult qualified tax and legal professionals regarding your individual circumstances.