Loan on insurance? Beware the IRS

If you plan to take out a low-interest loan, or already have one, from a source such as your insurance policy, and invest the proceeds in a higher-interest-paying investment, the Internal Revenue Service has a new trap ready to spring on you, a Chicago tax firm, Alexander Grant & Co., cautions.

As part of the law taxing windfall oil profits, Congress included a provision allowing a $200 exemption for interest and dividends in 1981 and 1982. The law disallows deducting interest on loans where proceeds are used to buy savings account certificates and most other interest-bearing investments that qualify for the exemption.