What is referred to as a policy loan?

A policy loan is specifically a loan taken against the cash value of a life insurance policy. When a policyholder accumulates cash value in a permanent life insurance policy, such as whole life or universal life, they can borrow against that cash value. This means that the insurer is willing to extend a loan to the policyholder using their accumulated cash value as collateral.

The amount that can be borrowed is typically a percentage of the cash value, and the loan does not require a credit check or specific repayment terms, as it is backed by the policy's cash value. If the loan is not repaid, the outstanding amount, plus any accrued interest, will be deducted from the death benefit payable to the beneficiaries upon the policyholder's death.

This option correctly describes how policy loans function, understanding that the nature of this process allows policyholders to access funds without surrendering their policy or incurring a taxable event, as the loan is not considered income.