Loan interest taxation in the context of life insurance refers to how interest charged on policy loans is treated for tax purposes and, in some business arrangements, for income deduction. For most personally owned policies, policy loan interest is not deductible by the policyowner and is simply an internal cost that reduces policy performance. In certain employer or business uses, such as split dollar or key person coverage, some interest payments may be deductible or treated as taxable compensation depending on structure and applicable rules. Additionally, when a policy with outstanding loans is surrendered or lapses, previously unpaid loan interest can increase taxable gain recognized by the policyowner.

In everyday advisory work, producers address loan interest taxation when clients use policy loans from cash value life insurance to supplement retirement income, fund premiums, or cover emergencies. They explain that although loan proceeds themselves are generally not taxable in non MEC policies, ongoing loan interest charges reduce cash value growth and can create a risk of policy lapse with taxable gain. In advanced markets, advisors coordinate with tax counsel on loan regime split dollar arrangements, where imputed interest rules and potential deductions must be considered carefully. For businesses, they clarify when interest on loans used to acquire employer owned policies may be limited or disallowed under Section 264. By understanding loan interest taxation, producers can design loan strategies that balance access to policy values with long term sustainability and minimize negative tax surprises when policies are surrendered, rolled over, or allowed to lapse.