How are loans obtained against the cash value of a life insurance policy treated for tax purposes?

Loans taken against the cash value of a life insurance policy are typically treated as nontaxable income. This means that when an individual borrows against the cash value, they do not incur an immediate tax liability on the amount borrowed. The Internal Revenue Service (IRS) considers these loans to be a form of borrowing rather than an income event. Therefore, as long as the policy remains in force and is not surrendered, any loans taken will not be subject to taxation.

It's important to note that if the policyholder dies while there is still an outstanding loan, the loan amount will be deducted from the death benefit paid out to beneficiaries. If the policy is surrendered, however, any amount exceeding the total premiums paid could be taxable. This highlights the significance of managing loans against cash value strategically, but initially, the act of borrowing itself remains nontaxable.