Another scenario that can trigger a «surprise» life insurance loan tax bomb is where the policy is using to as a «retirement income» vehicle, either through a version of the «Bank On Yourself» strategy, or simply by taking
ongoing loans against the policy to supplement retirement cash flows, and the loans grow too quickly and cause the policy to lapse.
Continuing the prior example, assume that Sheila had accumulated a whopping $ 100,000
policy loan against her $ 105,000 cash value, and consequently just received a notification from the life insurance company that her
policy is about to lapse due to the size of the
loan (unless she makes not only the
ongoing premium payments but also 6 % / year
loan interest payments, which she is not interested in doing).