What does the term "policy loan" refer to in life insurance?

The term "policy loan" specifically refers to a loan that policyholders can take out against the cash value of a permanent life insurance policy. Permanent life insurance, such as whole life or universal life, accumulates cash value over time, which serves as a financial asset for the policyholder. When a policyholder takes a loan against this cash value, they are essentially borrowing money from their own policy, and the insurance company uses the cash value as collateral.

This type of loan is advantageous because it typically offers lower interest rates compared to conventional loans, and in many cases, the policyholder does not need to undergo a credit check due to the nature of the loan being secured by the policy’s cash value. Additionally, the policyholder can borrow up to the available cash value of the policy, providing flexibility in accessing funds for various needs.

While the other options touch on different financial concepts related to insurance, they do not accurately describe a policy loan. Loans to purchase a life insurance policy or those that need not be repaid are not typical or standard practices. Furthermore, a policy loan does impact the death benefit, but its primary definition centers around the loan taken against the cash value that the policyholder can access. Thus, understanding the specific nature of “