Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
A policyowner borrows money from a life insurer using the policy as security. The loan is secured by:
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Answer & full 3-part explanation (select an option above, or peek)
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.