Rhode Island Life Insurance Practice Exam

In terms of policy loans, what must a policyholder consider?

1. Policy loans do not accrue interest

2. Loans can be taken against the cash value of the policy

3. Policy loans reduce the death benefit permanently

4. All policy loans require repayment within 30 days

The correct answer is: Loans can be taken against the cash value of the policy

A policyholder must consider that loans can be taken against the cash value of the policy. This is a fundamental feature of whole life insurance policies, where a portion of the premiums paid contributes to a cash value that accumulates over time. The policyholder can borrow against this cash value at generally favorable terms, and the loan does not require immediate repayment. While it’s important to note that the outstanding loan amount, along with any accrued interest, will reduce the death benefit that beneficiaries receive if the loan is not repaid, this effect happens only when the insured passes away or if the policy lapses. Therefore, while loans must be managed carefully, the ability to borrow against the cash value is a core benefit of such policies. In contrast, many other considerations listed in the other choices, such as the perceptions of interest accrual, the requirement for repayment within a short timeframe, or a permanent reduction of the death benefit regardless of the policyholder's actions, do not reflect the accurate mechanics and implications of policy loans. Understanding the nature of loans against the cash value empowers policyholders to manage their policies effectively and utilize this feature to their advantage when the need arises.