PSI Ohio Insurance Practice Exam 2026 – All-in-One Guide to Exam Success

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What is a key advantage of taking a policy loan over making a withdrawal from a life insurance policy?

The loan is not taxed

A key advantage of taking a policy loan over making a withdrawal from a life insurance policy is that the loan is not taxed. When a policyholder takes out a loan against the cash value of their life insurance policy, it is considered a loan rather than income. Therefore, it does not trigger tax obligations at that time, as long as the policy remains in force.

In contrast, making a withdrawal from the cash value can lead to tax implications, especially if the amount withdrawn exceeds the premiums paid into the policy. Withdrawals are typically regarded as income up to the policy's basis (the amount of premiums paid), which can create a tax event if the cash value exceeds that threshold.

Understanding this aspect is crucial for policyholders who wish to access funds without incurring tax liabilities, highlighting the importance of strategic financial planning when using life insurance policies.

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The loan has lower interest rates

The loan does not affect cash value

The loan increases the death benefit

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