A policyowner borrows money from a life insurer using the policy as security. The loan is secured by:

Why A is correct

A policy loan is a loan made by the insurer to the policyowner, secured by the policy's cash value. The loan accrues interest, and if it is not repaid, the outstanding balance plus interest is deducted from the death benefit or cash value upon surrender. Policy loans are available because the owner has a cash value interest in the policy. Access to loans is one of the owner's rights; because the loan is secured by the cash value, no collateral or credit check is required, and there is no personal liability beyond the cash value.

Why the other options are wrong

• B) The death benefit is the promise to pay at death and can be reduced by an unpaid loan, but it is not the collateral securing the loan.
• C) Policy loans do not require a credit check; the cash value itself is the collateral.
• D) No outside collateral such as a home mortgage is involved; the policy is self-secured by its cash value.

Memory hook

Cash value = the piggy bank that backs the policy loan, with interest payable on every borrow.

Why A is correct

A policy loan is an advance from the insurer secured by the policy's cash value. Interest accrues on the loan, and any unpaid loan balance plus accrued interest is deducted from the death benefit or cash value at settlement. If the loan plus interest exceeds the cash value, the policy terminates after the required notice. Policy loans require no credit check and are generally not taxable events because they are borrowings, not distributions.

Why the other options are wrong

• B) The loan is secured by the policy's cash value, not by the insured's creditworthiness.
• C) Loans are not interest-free and do reduce the policy's net cash value and death benefit by the outstanding balance.
• D) The borrowing limit is the available cash value — which is far less than the face amount of the policy.

Memory hook

Policy loan = borrow against your own cash value with interest; forget to repay and the policy sinks under the loan.