Indexed universal life gets a lot of attention for how it accumulates cash value. How that value is taken out matters just as much. Understanding the loan options inside an IUL helps advisors set realistic expectations and choose the approach that fits the client.
Key takeaways
- Most IUL policies offer fixed loans, variable (indexed) loans, or both.
- Fixed loans have a known interest rate, and many policies offer wash or zero-net-cost loans after a set number of years.
- Variable loans can create positive arbitrage when crediting exceeds the loan rate, but negative arbitrage can quickly erode income.
An illustration showing positive loan arbitrage looks great, until crediting falls below the loan rate and income has to shrink.
Accumulation is only half the story
IUL credits interest based on the performance of a chosen index, subject to caps or participation rates, with a floor that protects against losses from negative index years. That makes for a strong accumulation story. But most clients buying IUL for supplemental income will eventually take policy loans, and the loan type they choose can change results significantly. For background on the strategy, see IUL as a supplemental retirement strategy.
Fixed loans
With a fixed loan, the policy charges a stated interest rate on the outstanding balance, and the loaned amount is typically moved out of the index account. The cost is predictable. Many products also offer a preferred or wash loan after a certain number of policy years, where the rate charged equals the rate credited on the loaned value, for a net cost at or near zero.
Variable (indexed) loans
With a variable loan, the loaned value stays in the index account and continues to earn index credits, while loan interest accrues at a variable rate. When index credits exceed the loan rate, the client benefits from positive arbitrage, and illustrations can look very attractive.
The risk is negative arbitrage. In years when crediting is low or zero, loan interest still accrues, and the gap can compound. Income may need to be reduced to keep the policy from lapsing.
Choosing and explaining the right option
Either option can be appropriate depending on the client’s risk tolerance and whether they plan to pay loan interest as it accrues. What matters is that the client understands the trade-off before income starts. Choosing variable loans only because they illustrate better sets up a hard conversation later. Contact our Life Sales Team to compare loan provisions across carriers and illustrate conservatively.
Frequently asked questions
What is the difference between fixed and variable loans in IUL?
A fixed loan charges a stated interest rate and usually removes the loaned value from index crediting. A variable loan charges a variable rate while the loaned value keeps earning index credits, which can help or hurt depending on performance.
What is a wash loan in an IUL?
A wash or zero-net-cost loan is one where the interest charged equals the interest credited on the loaned value, often available after a set number of policy years.
What is negative arbitrage on an IUL loan?
It happens when the loan interest rate exceeds the rate credited to the policy. The shortfall can compound over time and reduce the income the policy can support.
Reviewed by Tim Fuller on 2026-09-26
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
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