The amount of gain in the policy (the current cash value minus the dollars you contributed along the way) would be taxed at ordinary income tax rates. (investopedia.com)
The end result: the policyowner never actually uses the life insurance loan directly, and finishes with a life insurance policy with a net cash surrender value of $ 0, and still gets a Form 1099 - R for the underlying gain in the policy. (kitces.com)
Note: This policy could be considered a Modified Endowment Contract at certain issue ages, and as such, any distributions (e.g., loans, dividends paid in cash or accumulated, or a policy assignment) will be subject to current income tax to the extent there is taxable gain in the policy. (statefarm.com)