Mary Howard, 61, a reader on the Atlantic Coast, tells me she couldn't believe her eyes. She was staring at a tax notice. She owed income taxes on $47,300 in mysterious gains, from a life-insurance policy she had allowed to lapse.

It lapsed because she had borrowed too much against the policy's cash value. She never imagined that taxes might be due.

You might be traveling the same road, if you borrow against your insurance and don't repay.

Some 87 million cash-value policies are in force today. One of the selling points is that you can tap them for an easy loan, including a loan to pay the policy's premiums.

People typically don't repay their insurance loans. You think, "I owe that money to myself, so what's the big deal?" You might even be planning on taking policy loans in the future, to supplement your retirement income.

Howard had borrowed, off and on, for many years. The $200,000 Nationwide Life policy was on her husband's (now ex-husband's) life. She'd owned it since 1972.

But there's a limit to how much money you can take. If your loans grow to equal the policy's cash value, the policy will collapse. The insurer will terminate the coverage.

Howard knew that her loans were building and that the policy could lapse. When that happened, however, she thought she'd be able to shrug her shoulders and walk away.

Alas, no such luck. When a cash-value policy collapses, income taxes are usually due. But Howard's agent never told her, and she got no tax alerts from Nationwide, as the loans built up.

"In this era of full disclosure and strict regulations to protect the public, I was never given any indication from any source that there were possible tax repercussions," Howard says.

Thousands of other people are on the same dangerous path, says Peter Katt, a fee-only life-insurance adviser in Kalamazoo, Mich. It's all too common for people to spend all their policy's cash values, without a clue as to what the consequences are.

Nationwide says that its agents aren't tax advisers, and in fact are instructed not to provide tax advice. Spokesman Bryan Haviland calls the Howard case "a rarity."

But it's not "tax advice" to tell people the consequences of ignoring policy loans. From time to time, Nationwide sent Howard a notice, suggesting that she repay. But the notice never mentioned the tax risk if the policy collapsed.

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