Are policy loans considered taxable income?

Are policy loans considered taxable income?

• A. Yes, always
• B. No, they are not taxable
• C. Only if the policy is surrendered
• D. Only if the loan amount exceeds the premiums paid

Answer: (B)

Policy loans are not considered taxable income as long as the life insurance policy remains in force. When a borrower takes out a loan against the cash value of their life insurance policy, they are essentially borrowing their own money. This transaction does not trigger a taxable event because the policyholder is not receiving income; rather, they are accessing their own funds. Taxability typically arises when policies are terminated or surrendered for cash, which may result in a gain if the cash value exceeds the total premiums paid. However, while the policy remains active and the loan is outstanding, there is no taxable income. This is why the correct answer states that policy loans are not taxable. It is important to remember that potential tax implications can arise if a policy is surrendered or if the loan amount exceeds the total premiums paid, but simply taking a loan does not automatically incur taxes.

Policy loans are not considered taxable income as long as the life insurance policy remains in force. When a borrower takes out a loan against the cash value of their life insurance policy, they are essentially borrowing their own money. This transaction does not trigger a taxable event because the policyholder is not receiving income; rather, they are accessing their own funds.

Taxability typically arises when policies are terminated or surrendered for cash, which may result in a gain if the cash value exceeds the total premiums paid. However, while the policy remains active and the loan is outstanding, there is no taxable income.

This is why the correct answer states that policy loans are not taxable. It is important to remember that potential tax implications can arise if a policy is surrendered or if the loan amount exceeds the total premiums paid, but simply taking a loan does not automatically incur taxes.