Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
When a policyowner borrows against a life insurance policy, the loan:
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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 from the insurer secured by the policy's cash value, not a loan from a third-party bank. Interest accrues on the borrowed amount, and if the loan is not repaid, the outstanding balance plus interest is deducted from the death benefit or the cash value at surrender. The loan is not taxable income because it is a borrowing, not a distribution. This is a standard contract provision under objective LIFE-II.E.7.
Why the other options are wrong
- B) The policy loan is secured by cash value and has no fixed one-year repayment deadline; it may be repaid at any time or left to reduce benefits.
- C) Borrowing does not increase cash value; it draws down or encumbers the existing cash value.
- D) The death benefit is reduced, not increased, by an outstanding loan balance at death.
Memory hook
Policy loan = borrow from your own cash value. Unpaid loan shrinks the death benefit.