What is the risk of borrowing against a VUL policy's cash value?

When borrowing against a Variable Universal Life (VUL) policy's cash value, one significant risk is that the amount borrowed reduces the death benefit. This occurs because the outstanding loan balance owed to the insurance company is subtracted from the total death benefit payable to beneficiaries upon the policyholder's death. Therefore, if a policyholder borrows a portion of the cash value and does not repay that loan, the beneficiaries will receive a lower death benefit.

The nature of a VUL policy allows the policyholder to access cash value through loans, but this convenience comes with the understanding that the borrowed amount diminishes the financial legacy intended for heirs. In contrast to other potential consequences of borrowing—such as significantly increasing premiums or requiring compulsory repayment—this direct impact on the death benefit is particularly critical in understanding how such transactions influence the overall financial planning associated with the policy.