Question

31 carlos owns a $500,000 ul insurance policy and he wishes to withdraw some cash from the policy to pay for home renovations. he contacts his insurance agent to understand the process of withdrawing cash from the policy. his agent advises carlos that he should get a policy loan instead of withdrawing cash from the policy. which of the following statements justifies the agents advice?
a. there is no limit with regard to the amount of loan that can be taken against the policys cash value.
b. with a policy loan, funds continue to earn tax - sheltered income within the policys investment account.
c. a policy loan is not considered a taxable disposition and does not result in taxable income to carlos.
d. the interest rate charged on a policy loan is relatively less making it more appealing than a cash withdrawal.
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Explanation:

To determine the correct option, we analyze each choice:

• Option a: A loan against a UL policy's cash value typically has limits (e.g., up to the cash value), so "no limit" is incorrect.
• Option b: A policy loan allows funds to stay in the policy's investment account (growing tax - sheltered), and the loan itself isn't taxable income (unlike a cash withdrawal which may be taxable). This matches the agent's advice to take a loan.
• Option c: A policy loan is not a taxable disposition (cash withdrawal may be), so this is incorrect.
• Option d: Policy loan interest rates are often not "relatively less" appealing; in fact, cash withdrawal tax implications make loan more appealing, so this is incorrect.

Answer:

b. With a policy loan, funds continue to earn tax - sheltered income within the policy's investment account.