Permanent life insurance policies with a cash value (e.g., whole life, universal life) allow policyholders to take loans against the cash value. According to IRS guidelines and standard insurance principles, policy loans are not considered taxable income because they are treated as a debt against the policy’s cash value, not as income. However, if the policy lapses or is surrendered with an outstanding loan, the loan amount exceeding the policy’s basis may become taxable.
Option A: Incorrect. Policy loans do not accelerate benefits (e.g., death benefits or living benefits); they reduce the cash value and death benefit until repaid.
Option B: Correct. Policy loan proceeds are not treated as taxable income, as they are a loan against the policy’s cash value.
Option C: Incorrect. Policy loans are not subject to Federal estate tax unless the policy’s death benefit is included in the estate, which is unrelated to the loan itself.
Option D: Incorrect. Interest on policy loans is not nontaxable; it is charged by the insurer and does not generate income for the policyholder.
This question falls under the Prometric content outline section on “Provisions, Options, Exclusions, Riders, Clauses, and Rights,” which includes knowledge of policy loans and their tax implications.
[:, Prometric Oklahoma Life, Accident, and Health or Sickness Producer Exam Content Outline (Section: General Knowledge – Life Insurance Provisions)., Oklahoma Insurance Department, Title 36 O.S. § 4029 (nonforfeiture benefits and cash value provisions)., IRS Publication 525 (Taxable and Nontaxable Income, section on life insurance policy loans)., ]
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