Final answer:
Yes, it is true that owners can borrow against a life insurance policy's cash surrender value without recognizing income, as the borrowed amount is a loan and not considered taxable. However, this loan must be repaid with interest and can impact the death benefit if not managed carefully.
Step-by-step explanation:
The statement that 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 is True. A cash-value life insurance, also known as whole life insurance, offers both a death benefit and a cash value component. The cash value represents an amount that accumulates over time and can be used by the policyholder as a tax-deferred account.
Life insurance companies allow policy owners to borrow against the cash value of their policies. This borrowed amount does not mean you are 'cashing out' your policy. Since it's a loan, it is not considered taxable income. However, it's important to note that the loan must be paid back with interest. If it's not paid back, the outstanding loan amount and interest could reduce the death benefit. Policyowners must be aware that even though they have access to these funds, the loan mechanics must be managed properly to avoid eroding the policy's overall purpose.