Final answer:
By borrowing on a life insurance policy's cash surrender value, the owner can access the accumulated cash without incurring taxable income. This cash value acts as a financial reserve that accrue over the life of the policy and can be borrowed against, although such loans accrue interest and must be repaid.
Step-by-step explanation:
By borrowing on a life insurance policy's cash surrender value, the owner can receive the policy's increase in value in cash without recognizing income. Cash-value (whole) life insurance policies not only provide a death benefit to beneficiaries but also accumulate a cash value over time. This accumulated cash can eventually serve as a fund that the policyholder can tap into, usually through a loan.
Life insurance companies, after paying out claims, often have substantial cash reserves. These reserves can be made available to policyholders in the form of loans based on the amounts already contributed to the policy. However, any money borrowed against the policy's cash value accrues interest and must be repaid to the life insurance company.