Nobody bills you. No collector calls, nothing shows up on a credit report, and the policy keeps working. That's the honest answer for the first several years, and it's why balances sit.
What's happening underneath is compounding. Unpaid interest gets added to the loan each anniversary, and then next year's interest is charged on the larger number. At 5%, a $50,000 loan is about $63,800 in five years and $81,400 in ten. The balance grows at a fixed rate on a schedule that doesn't care what the policy earns.
On the other side, cash value grows too. If it grows faster than the loan rate, the gap widens in your favor and the loan can sit indefinitely. If the policy is credited 0% in an IUL down year while the loan charges 5%, the gap closes by 5% that year. Two or three of those in a decade is normal. Six is a different situation.
The failure point is when the loan balance approaches the cash value. The carrier sends a notice, and it looks like a routine statement. If you don't add money or repay part of the loan, the policy lapses. That's when the tax arrives, and it's the part almost nobody sees coming: the IRS treats the lapse as though you received the full loan amount, so the gain above your cost basis becomes ordinary income. A policy that lapses with a $300,000 loan and a $120,000 basis produces $180,000 of taxable income in a year you got no cash at all. That's a CPA conversation, and it's one to have before the notice arrives rather than after.
There's no death benefit at that point either. The coverage is gone, the family gets nothing, and there's a tax bill.
Dying with the loan outstanding is a completely different outcome, and a much better one. The loan is settled from the death benefit, the remainder goes to your beneficiary income-tax-free, and nothing is taxed as income. That asymmetry is why borrowing and never repaying works when it works, and it only works if the policy stays in force until you die.
Which makes the job simple to state. Keep the policy alive. Watch the ratio of loan balance to cash value on every annual statement, and if it's climbing past 70% or so, either the loan needs payments or the policy needs more premium. An overloan protection rider is designed to catch this at the last moment, and it has conditions you should read before relying on it.
The practical version for most people is paying the annual loan interest out of pocket. On a $50,000 loan at 5%, that's $2,500 a year, and it stops the compounding cold. The balance stays $50,000 for as long as you keep writing that check.