Borrowed money is not your money, so you don't pay tax on money that is not yours. With a loan against life insurance proceeds, the only way it would become your money and thus taxable, would be if you did not pay it back as agreed. In some cases, if you die before paying it back, the unpaid balance may be taxable. If your state taxes income, they may see things different from the federal IRS. So you should seek information on that from your insurance provider "and" a tax pro in your local area. I would not expect your insurance provider to be that knowledgable on the tax front. But I would expect a tax pro to know the facts as they pertain to "your" life insurance policy, after they review the policy and the terms of the loan.
