Loans against the cash value of the life insurance policy are typically treated for tax purposes as:

• A. Taxable income
• B. Deductible
• C. Capital gains
• D. Not taxable income

Answer: (D)

Loans against the cash value are not taxed as income because they’re treated as loans against your own money inside the policy, not as a withdrawal or sale. As long as the policy stays in force and you repay the loan, the proceeds aren’t considered taxable income. The loan isn’t deductible, and it doesn’t create capital gains. The tax comes into play only if the policy lapses or is surrendered with an outstanding loan, in which case any gains in the policy may be taxed as ordinary income, and the outstanding loan reduces the death benefit.