What is a policy loan in the context of life insurance?

A policy loan refers specifically to borrowing against the cash value of a permanent life insurance policy, such as whole life or universal life insurance. When a policyholder has accumulated cash value in their permanent policy, they can take out a loan against that amount. The insurer allows this as part of the features of the policy, providing policyholders with flexibility.

The amount that can be borrowed is typically limited to a percentage of the cash value, and the loan does not require a specific repayment schedule; however, interest does accrue, and unpaid loans may reduce the death benefit or the cash value if they remain outstanding. This option enables policyholders to access funds while retaining the value of their life insurance coverage.

In contrast, the other options do not accurately capture the nature of a policy loan:

• A loan from the insurer for any purpose does not specify that it must be tied to a policy's cash value, making it an inaccurate definition.
• A repayment plan for previous premiums does not describe a loan but rather a payment process, which is unrelated to borrowing.
• A loan upon the death of the insured pertains to benefits paid out rather than borrowing, which is also not correct within the context of a policy loan.