As some clients may have realized, loans against cash-value life insurance policies can be made at relatively favorable interest rates. However, those clients run the risk of a substantial tax liability if the loan compounds out of control. This can happen whether the loan was a proactive “bank on yourself” borrowing strategy, or just a loan that accidentally was allowed to accrue too far over time.

For advisers who have clients that come in with existing life insurance policies carrying substantial loans, it's important to understand the ins and outs of the process to rescue the policy before an adverse tax consequence results.

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