Available cash values may also serve as an “emergency reserve,” if needed, or a source of loans, since life policies frequently include features permitting borrowing against these cash
The discussion here concerns federal income tax law; state or local tax law may vary.
A policy loan or withdrawal will generally reduce cash values and death benefits. If a policy lapses or is surrendered with a
loan outstanding, the loan will be treated as taxable income in the current year, to the extent of gain in the policy. Policies
considered to be modified endowment contracts (MECs) are subject to special rules.