Policy Loan
A loan taken by a life insurance policyholder against the cash value of their policy, which is not considered income and is therefore not subject to income tax.
Understanding Policy Loan
Policy loans are the primary mechanism for tax-free income distributions from IUL and other cash-value life insurance policies. Because the policyholder is borrowing against their policy rather than withdrawing funds, the transaction is not a taxable event. Interest accrues on outstanding loans, which can reduce the death benefit and cash value if not managed properly.
Why This Matters for Retirement: Understanding Policy Loan is essential for making informed decisions about tax-free retirement income strategies. Whether you are evaluating an IUL policy, planning Roth conversions, or comparing retirement vehicles, this concept directly affects your outcomes.