A policyowner borrows money from the insurer using a permanent life policy. The policy loan is best described as:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A policy loan is a borrowing from the insurer using the policy's cash value as collateral. The policyowner may borrow up to the available cash value, and interest accrues on the loan. If the loan is not repaid before death, the outstanding loan balance plus accrued interest is deducted from the death benefit paid to the beneficiary; if the loan and interest exceed the cash value, the policy may lapse. Because the loan is collateralized by the cash value, no credit check is required, and a loan is generally not a taxable event under federal income tax rules.
Why the other options are wrong
- B) A policy loan is secured by the cash value of the policy. It is not based on the insured’s credit score, and no credit underwriting or qualification is required beyond the available cash value.
- C) A loan is not a taxable distribution, and the death benefit is reduced only by the outstanding loan balance plus accrued interest. It is not reduced dollar for dollar by the full amount borrowed beyond that.
- D) A policy loan does not require surrendering the policy as repayment. The policy remains in force, and the loan operates as a lien against the cash value while coverage continues.
Memory hook
Policy loan = borrow against your own cash pile. Unpaid balance plus interest is docked from the death benefit.