Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
A policyowner borrows from a whole life policy using the policy loan provision. Which statement about this loan is correct?
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Answer & full 3-part explanation (select an option above, or peek)
Why C is correct
The policy loan provision lets the policyowner borrow against the policy's cash value, which serves as collateral for the loan. Interest accrues on the outstanding balance, and if it is not repaid, the balance plus interest is deducted from the death benefit or the cash value when the policy is settled. Policy loans are not taxable events because they are treated as loans rather than income, and no credit underwriting is required because the cash value fully secures the borrowing.
Why the other options are wrong
- A) Policy loans require no credit check; the loan is secured entirely by the policy's cash value, which makes the risk to the insurer minimal.
- B) Policy loans are generally not taxable; taxation arises only on surrender or withdrawal of amounts that exceed the owner's cost basis.
- D) An unpaid loan reduces the death benefit by the loan balance and interest but does not automatically cancel the policy.
Memory hook
Borrow from yourself: the cash value is the collateral and the death benefit is the security.