We can’t pay interest on life insurance loan and have very little cash value

The remainder of your CSV will indeed be taxable income, however if you wish to avoid losing more, you could consider the following :

1) Assuming your income situation will inevitably improve and without a doubt be more next year than it was this year, then you could consider opening a new loan that would allow you to consolidate all of your life insurance debt and possibly any other credit card debt into one lump sum. This will reduce the amount of bills you'll have to pay monthly and perhaps allow you to keep your life insurance policy once the loan is paid off depending on the policy requirements.

2) Close out your insurance policy and receive the rest of the CSV... if you live in a state that has both state and federal taxes garnished from your 1099 form then perhaps option 1 is best. However if you only have to pay federal taxes, and there are no state taxes in sight....then perhaps it's time to look into those deductions...if you use your new income to weatherize your home, or take advantage of other beneficial exemptions available for 2016, then the deductions on income might be enough to balance the sheets. Speak with a tax specialist in the event that you wish to go this route. They might also be able to inform you on which tax shelters such as HSA's or 401k's to use, you may even be able to open an account online to deposit the CSV into immediately. It is even possible that you qualify for deductions this year that you are not even aware of. Check with IRS.gov to figure out what you want to discuss with the tax specialist...many consultations are free and over the phone. I believe turbo-tax also allows for free assessments if you chat with them online.

3) Another option is to do what you can to save the life insurance policy and consolidate every bill possible. That is assuming there's a chance your cash value will continue to grow if you do save the policy.