During a liquidity crisis assets normally must be sold at a loss because of the rising interest rates caused by financial institutions attempting to raise funds.

Kelly, age 48, owns a universal life insurance policy (non-MEC) with a current death benefit of $270,000 and a cash value of $20,000. Her basis in the policy is $12,000. Kelly is interested in either borrowing or withdrawing $15,000 from this policy. What would be the tax consequences if she were to borrow the $15,000 through a policy loan?

A) Of the amount borrowed, $12,000 would be income tax-free, $3,000 would be subject to income taxation, and there would be an additional penalty tax. B) There would be no income taxation on any portion of the amount borrowed, whether or not she repaid the policy loan. C) Of the amount borrowed, $12,000 would be income tax-free and $3,000 would be subject to income taxation. D) There would be no income taxation on any portion of the amount borrowed, but if she did not repay the loan, $3,000 would be subject to income taxation.

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