Which statement about a policy loan on a whole life policy is correct?

Why A is correct

A policy loan is an advance from the insurer against the policy's cash value. The loan is not taxable income because it is a loan, not a distribution, under IRC §72; interest accrues and the outstanding balance plus interest reduces the death benefit if unpaid at the insured's death. Loans reduce the cash value available, and if the loan with interest exceeds the cash value, the policy can lapse. The beneficiary has no lending role, and the debt is never forgiven — the net death benefit is simply reduced by the amount still owed.

Why the other options are wrong

• B) The insurer is the lender under a policy loan; the beneficiary neither lends money to the insured nor is obligated to repay the loan.
• C) Policy loans are borrowings against cash value, not distributions, so they are not taxable income when received. Taxation of cash value arises on surrender or withdrawals, not on loans.
• D) Outstanding loans are not forgiven at death. The unpaid principal plus accrued interest is deducted from the death benefit payable to the beneficiary.

Memory hook

Borrow from your policy's piggy bank — and the bank takes its cut from the death check.

Why A is correct

A policy loan is a loan from the insurer secured by the policy's cash value. If the loan and accrued interest are not repaid, they are deducted from the proceeds payable at death, or from the cash value at surrender. The policyowner may repay all or part of the loan at any time, and interest accrues on the outstanding balance. An unpaid loan therefore reduces the net amount the beneficiary receives. Policy loans are generally not taxable because they are borrowings, not distributions, but they reduce the death benefit and can even cause a policy to lapse if the loan exceeds the cash value.

Why the other options are wrong

• Policy loans are never forgiven; the outstanding balance must be repaid or it is deducted from the policy proceeds.
• A loan reduces the net death benefit; it never increases the face amount of the policy.
• The beneficiary receives the net proceeds after the deduction; no repayment obligation is placed on the beneficiary by the insurer.

Memory hook

Borrow from the policy and the death benefit comes up short by the loan plus interest.