Are Loans From Life Insurance Taxable?
Loans from life insurance policies are generally not taxable. This is because they are considered a form of debt rather than income. When you take out a loan against your life insurance policy, you’re essentially borrowing from the cash value of the policy. The IRS does not treat this as income because it’s a loan that you’re expected to repay.
Tax Implications of Life Insurance Loans
- Loan Nature: Loans from life insurance are debts, not income.
- No Tax Liability: Generally, no taxes are due when you take a loan.
- Interest Payments: Interest may accrue on the loan, but it’s not typically taxable.
- Policy Status: If the policy lapses or is surrendered with a loan outstanding, the amount exceeding the premiums paid may be taxable.
Key Points to Remember
- Repayment: Loan repayment is not mandatory, but unpaid loans and interest reduce the death benefit.
- Policy Cash Value: Loans are only available if the policy has accrued sufficient cash value.
- Policy Types: Permanent life insurance policies (like whole life and universal life) typically offer this feature, not term life insurance.
Understanding the tax implications of borrowing from your life insurance policy is crucial in financial planning. Loans from these policies offer a tax-advantaged way to access funds but also carry certain risks and considerations. For personalized advice and more information, contact us today for a free quote.
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