Trade or Business Exception for Policy Loans

§ 264. Certain amounts paid in connection with insurance contracts(a) General ruleNo deduction shall be allowed for—(1) Premiums on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract. (2) Any amount paid or accrued on indebtedness incurred or continued to purchase or carry a single premium life insurance, endowment, or annuity contract. (3) Except as provided in subsection (d), any amount paid or accrued on indebtedness incurred or continued to purchase or carry a life insurance, endowment, or annuity contract (other than a single premium contract or a contract treated as a single premium contract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of such contract (either from the insurer or otherwise). (4) Except as provided in subsection (e), any interest paid or accrued on any indebtedness with respect to 1 or more life insurance policies owned by the taxpayer covering the life of any individual, or any endowment or annuity contracts owned by the taxpayer covering any individual. Paragraph (2) shall apply in respect of annuity contracts only as to contracts purchased after March 1, 1954. Paragraph (3) shall apply only in respect of contracts purchased after August 6, 1963. Paragraph (4) shall apply with respect to contracts purchased after June 20, 1986. (b) Exceptions to subsection (a)(1)Subsection (a)(1) shall not apply to—(1) any annuity contract described in section 72(s)(5), and (2) any annuity contract to which section 72(u) applies. (c) Contracts treated as single premium contractsFor purposes of subsection (a)(2), a contract shall be treated as a single premium contract—(1) if substantially all the premiums on the contract are paid within a period of 4 years from the date on which the contract is purchased, or (2) if an amount is deposited after March 1, 1954, with the insurer for payment of a substantial number of future premiums on the contract. (d) ExceptionsSubsection (a)(3) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or continued as part of a plan referred to in subsection (a)(3)—(1) if no part of 4 of the annual premiums due during the 7-year period (beginning with the date the first premium on the contract to which such plan relates was paid) is paid under such plan by means of indebtedness, (2) if the total of the amounts paid or accrued by such person during such taxable year for which (without regard to this paragraph) no deduction would be allowable by reason of subsection (a)(3) does not exceed $100, (3) if such amount was paid or accrued on indebtedness incurred because of an unforeseen substantial loss of income or unforeseen substantial increase in his financial obligations, or (4) if such indebtedness was incurred in connection with his trade or business.