I have to say that I doubt that you get the arbitrage. I'd have to look over the IUL contract very closely before I'd believe that. A loan against an IUL sounds similar to a loan against a 401-k. And every 401-k loan I've looked at excludes the loan balance when computing the gains.Say you have $1,000,000 in an IUL, and you borrow out $900,000. The company says, "No problem, the index increases 12% this year, so we'll just give you $120,000 -- even though you only have a net account balance of $100,000." Unbelievable.I believe in the case of the IUL loan, the money actually stays in the account. It is basically collateral for their money that they loan you. I suppose you could also use the IUL policy as collateral for a third party loan. But you bring up an interesting problem of what happens when you get close to the max LTV. You still have to pay the interest, but you can't borrow any more money to pay the interest. You're toast at that point.
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