Not all wealth is created equal!
We are all rather familiar with statement wealth. Statement wealth are accounts with balances.
Bank Accounts
Brokerage Accounts
These are accounts that give you control over the underlying asset.
Contract wealth may have underlying assets for your control, but not always.
Company or Federal Pension
Social Security Benefits
Illiquid Annuities (income only, rather than an asset to control; similar to a pension)
These assets do not necessarily have an underlying asset value that you can control. For example, you cannot get a "lump sum" of your Social Security benefits at any time.
Why talk about this? Because some contracts have more favorable tax treatment under the IRS Tax Code than many assets do! You may not have as large of an "asset" within a contract, but you may be able to spend FAR MORE because of the tax treatment of that contract! On Page 27 (page 29 of this PDF) of the United States General Accounting Office report in January, 1990... it states the following:
"If a policyholder borrows the inside buildup from his or her life insurance policy, the amount borrowed is considered a transfer of capital, not a realization of income, and, therefore, is not subject to taxation. This reasoning is in accord with tax policy on other types of loans, such as consumer loans or home mortgages. These loans are merely transfers of capital or savings from one person to another through a financial intermediary. The ability to borrow against a life insurance policy means that the interest income that is supposed to be building up to fund death benefits can instead be a source of untaxed current income. If the loans are not repaid, the inside buildup will never be taxed; death benefits will simply be reduced by the amount of the loan. Thus, policyholders have the use of tax-free income for purposes other than insurance at the expense of reduced death benefits for their beneficiaries."
You can't do that with your "Statement Wealth" accounts! I'm not saying that having "Statement wealth" is bad. It's simply on the radar of the tax code, the United States Congress, and the Internal Revenue Service. By being successful in your accounts, you will be taxed for that success. Yet, with certain kinds of contracts, you can have contract benefits - particularly under the tax code. But won't Congress change the taxation of these loans?
No way. Re-read the paragraph. It is treated the same as any other source of borrowing: credit cards, auto loans, mortgage loans, etc. None of these loans are considered "income" for taxation. Neither will life insurance loans used for cash flow. Is there even a space on the IRS 1040 for any loan proceeds received? No, there isn't. And that would be the same non-existent space where you would report this loan cash flow from your life insurance policy.
Just a distinction to consider.
One important disclosure: The taxation of these loans will only remain tax-exempt as long as the policy remains in force. If the policy "implodes", lapses, or is surrendered, all loans and gains in the policy will end up being taxable all in the year the policy lapses. It's called "phantom income", so managing the policy with a skilled insurance professional will be key.