Which statement best describes the taxation of policy loans when the policy is not a MEC?

Which statement best describes the taxation of policy loans when the policy is not a MEC?

• A. Loans are always tax-free as long as the policy remains in force.
• B. Loans are taxed on the loan amount while the policy remains in force.
• C. Loans are generally not taxed as long as the policy remains in force; gains may be taxable if the policy lapses with a loan.
• D. Loans are taxed as capital gains when the loan is outstanding.

Answer: (C)