Category: Deductions & Credits
Subject: Interest Expense
Title: Interest on Insurance Loans
IRC Sections: 264, 163(d), 469(e)
Filename: 1140.html
Date Produced: 2/96

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Issue
Is interest paid on a life insurance policy loan investment interest or personal interest? This assumes that the disallowance provisions of Section 264 are inapplicable.

Discussion
I cannot locate anything that specifically addresses the investment interest ramification of life insurance policy loans. Most commentators assert without any justification that interest on a loan to carry a life insurance policy is personal interest.

Investment interest is interest properly allocable to property held for investment. Section 163(d)(3)(A). Property held for investment means property which produces portfolio income (as defined in Section 469(e) or gains from dispositions of such property. Section 163(d)(5)(A). Portfolio income is interest, dividends, annuities, or royalties not derived in the ordinary course of business.

I cannot locate any reference in the tax literature to the issue of whether income generated by a life insurance policy is portfolio income. I see no reason to think that such income would be portfolio income as defined in Section 469(e). Accordingly, it is my view that any interest related to carrying a life insurance policy outside of a trade or business context would be personal interest.