What is a "policy loan" in life insurance?

A policy loan represents a borrowing option available to policyholders who have accumulated cash value in their life insurance policies, such as whole life or universal life policies. When a policyholder takes out a loan against the cash value, they are essentially borrowing money based on the amount of equity they have built up in their policy.

This type of loan typically does not require a credit check or a formal application process, as the policy itself serves as collateral. One significant advantage of policy loans is that they can often be issued at relatively low-interest rates when compared to traditional loans. However, it’s important to remember that any outstanding loans, along with accrued interest, will reduce the death benefit payable to beneficiaries if not repaid before the policyholder passes away.

The other options do not accurately describe what a policy loan is. A policy loan is not a default notice issued by an insurer or exclusive to premium payments, nor is it a gift from the insurance company. Understanding the nature of policy loans is crucial for policyholders, as it can provide valuable financial flexibility while also carrying certain implications for their insurance coverage.