Loans obtained by a policyowner against the cash value of a life insurance policy are treated in what way for tax purposes?

When a policyowner takes a loan against the cash value of a life insurance policy, the loan is not treated as taxable income. This is because loans are considered to be borrowing against the value of the policy rather than income that one has earned. As long as the policy remains in force and the loan is not deemed to be a distribution (for instance, if the policy is surrendered or lapses with an outstanding loan), the amounts borrowed from the policy do not trigger any tax liability at the time the loan is taken.

It's important for policyowners to understand that while the loan itself is not taxable, any unpaid interest on the loan may be considered in the eventual tax implications when the policy is terminated or paid out. Therefore, the correct understanding is that loans against the cash value of a life insurance policy are not subject to taxation at the moment they are taken, which aligns with the choice indicating they are not treated as taxable income.