Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
When a policyowner borrows against a life insurance policy, the loan is:
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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 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.