For tax purposes, what is the characterization of money borrowed from a life insurance policy?

When money is borrowed from a life insurance policy, it is generally considered not taxable to the policyholder. This is because loans taken against the cash value of a life insurance policy do not count as income; instead, they are viewed as a borrowing of funds. As long as the policy remains in force and the loan is secured by the cash value, the amount borrowed does not trigger a tax liability.

It is important to note that the loan must be paid back, and if the insured individual passes away while there is an outstanding loan, the amount owed will be deducted from the death benefit paid to beneficiaries. However, until that point, the cash value accessed through a loan does not generate taxable income, making the characterization as not taxable accurate for tax purposes.