Do Surrender Charges Apply When You Take a Loan From a Max-Funded IUL?

Surrender charges are the fees a carrier takes if you pull money out of a policy or close it down in the early years. They're there to recoup the cost of putting the policy on the books. So a reasonable worry goes like this: if I borrow against my cash value in year two, do I get hit with one?

No. A policy loan isn't a withdrawal. The carrier lends you its own money and uses your cash value as collateral, while your cash value stays in the policy. Surrender charges apply when you take money out of the policy itself or surrender the whole thing. The loan interest is a separate cost, and a loan reduces your cash value and death benefit while it's outstanding.

Timing is a different question. On a max-funded IUL (one funded as heavily as the MEC limit allows), you can borrow after two years with most carriers I know. Some carriers allow a loan in the first year. At least one popular IUL carrier does not, so ask before you buy if you'll want access that early. The cash value itself may also be lower than your total premiums in year two, which limits how much you can borrow.

Some carriers sell a liquidity rider. A rider is an add-on to the policy, and this one removes the surrender charges so that you can reach the full accumulated cash value in the first year. It costs something, which means lower overall returns. I usually leave it off a design built for maximum cash value. After year one, surrender charges on a max-funded policy are small enough that you'll hardly notice them. If you know you'll need all of the money in the first twelve months, such as for a real estate deal, the rider makes sense. If you can get through year one without it, I wouldn't pay for it.

The live-stream question that started this is answered in a short video on borrowing from a max-funded IUL after two years.

The difference between cash value and surrender value is a useful read before you borrow, since the surrender value is the number that shrinks in the early years. Then look at your own contract. Find the surrender charge schedule, which usually runs a table by year, and the first year a loan is allowed.