Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
Which statement about a policy loan on a whole life policy is correct?
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Answer & full 3-part explanation (select an option above, or peek)
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.