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

A policy loan refers to borrowing against the cash value that has accumulated in a permanent life insurance policy, such as whole life or universal life insurance. As these types of policies build cash value over time, the policyholder has the option to take out a loan against that cash value. This can be an advantageous feature because the loan does not require a credit check, and the insured does not need to repay it within a specific timeframe. The interest on the loan is charged, and if the loan is not repaid, the amount borrowed will be deducted from the death benefit when the insured passes away.

The other choices do not reflect the nature of a policy loan accurately. Taking a loan to purchase a new policy does not involve borrowing against an existing cash value. Loans given to beneficiaries after death pertain to the proceeds of a policy rather than to any cash value. Finally, loans to pay premiums on temporary insurance would not apply, as temporary policies, such as term insurance, do not accumulate cash value and therefore do not offer a mechanism for loans.