Accessing policy cash value can be a double-edged sword:

Loans: Pros and Cons

Loans are typically easier than bank credit checks and can carry reasonable interest rates. They also don’t immediately trigger taxes. Yet, the accumulation of loan interest and the reduction in death benefit pose risks if not managed. If the policy eventually lapses, a large unpaid loan can transform into taxable income exceeding your cost basis.

Withdrawals: Maintaining a Basis Strategy

Withdrawals up to basis are generally tax-free. Strategically, policyholders might first withdraw basis (the sum of paid premiums) before tapping gains. Exceeding basis can trigger taxation. Moreover, each withdrawal often reduces the death benefit.

Lapse After a Loan: A Major Hazard

If subaccount performance plummets or COI charges skyrocket and you’ve taken substantial loans, you can face a scenario where the policy’s net value goes negative, causing a lapse. In that moment, the outstanding loan above your basis may be treated as income, generating an unwelcome tax burden.