Final answer:
The incorrect statement about cash value loans against a life insurance policy is that the interest payments made by the policyowner are deductible. In fact, interest on such loans is not typically tax deductible.
Step-by-step explanation:
The statement that is NOT true regarding a cash value loan against a life insurance policy is 'Interest payments made by the policyowner are deductible.' Interest on loans against life insurance policies is typically not tax deductible because the loan is considered personal interest. Let's review the other options:
- Interest normally accrues on unpaid balances. This is true, as the insurance company will charge interest on the loan amount that remains unpaid.
- The loan cannot exceed the policy's cash value. Also true, since the loan is secured by the cash value of the insurance policy, the amount borrowed cannot be more than what the cash value is.
- Policy contract terms dictate the interest rate. Yes, the interest rate is determined by the terms and conditions of the policy contract, and can vary between different policies and insurance companies.
The correct answer to the question is that the interest payments on a cash value life insurance loan are not tax deductible.