How does a policy loan affect cash value and death benefit?

• A. It increases the policy’s cash value.
• B. It reduces the policy’s cash value and, if unpaid, reduces the death benefit by the loan amount plus interest.
• C. It has no effect on the death benefit.
• D. It terminates the policy immediately.

Answer: (B)

When you take a policy loan, you’re borrowing against the cash value of a permanent life policy. The cash value is reduced by the loan amount, and interest starts accruing on that loan. If you don’t repay the loan, the outstanding loan balance (including accumulated interest) is subtracted from the death benefit when the insured dies. In effect, the payout to beneficiaries becomes the face amount minus the loan balance. If you repay the loan, the cash value recovers and the death benefit is restored to its full amount (again, reduced only by any remaining loan balance).