PSI Life Exam Practice Test

The policy loan proceeds are reported for tax purposes when the loan is taken because this action represents a realized transaction. When a policyholder borrows against the cash value of their life insurance policy, the amount borrowed is not considered taxable income at the time of the loan. Instead, it is treated as a loan against the policy's cash value. However, for taxation purposes, the loan itself is recognized at the point it is accessed, which is when the policyholder chooses to take out the loan.

In other cases, if the policyholder were to cancel the policy or if the total amount of the loan exceeded the policy's cash value, this could result in taxable events. Therefore, the timing of when the loan is acknowledged for tax purposes becomes critical in understanding how it can affect overall tax liability.