A loan taken against the cash value of a life insurance policy is generally:
Explanation
A policy loan is not treated as taxable income while the policy stays in force, because it is a loan against the owner's own cash value, not a distribution. It is not automatically taxable, the interest is generally not deductible for personal policies, and there is no fifty percent penalty. However, if the policy later lapses or is surrendered with a loan outstanding, the previously untaxed gain can become taxable, so unpaid loans carry a hidden tax risk (and this does not apply the same way to a MEC).
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Related questions on this topic
- Once a policy is classified as a modified endowment contract (MEC), distributions taken during the insured's life, such as loans and withdrawals, are:
- A Section 1035 exchange allows a policyowner to:
- Which of the following is a permissible tax-free Section 1035 exchange?
- If a policyowner surrenders a whole life policy for its cash value, any amount received above the total premiums paid (the cost basis) is:
- Dividends paid on a participating life insurance policy are generally treated for federal tax purposes as:
- Premiums paid for a personal life insurance policy are generally:
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