California Accident and Sickness Practice Exam 2025 – Complete Study Resource

When a policyowner takes a loan against their whole life insurance policy, it is true that the loan accrues interest and, if it remains unpaid at the time of the policyowner's death, reduces the death benefit. Whole life insurance policies build cash value over time, and policyowners can borrow against this cash value. The loan itself does not require repayment within a specific timeframe; instead, it is subject to interest charges which accumulate over time. If the loan balance, along with any accrued interest, is not paid back, the outstanding amount is deducted from the death benefit that would otherwise be paid to beneficiaries upon the policyowner's death. This means that the greater the loan and interest, the lower the amount beneficiaries will receive.

The other options address various misconceptions about how these loans work. For example, there is no mandatory repayment period, and the insurer does not consider the policyowner's credit score for these loans since the loan is secured by the policy's cash value. Also, while the cash value of the policy continues to earn interest even if a loan is taken out, any outstanding loan balance does incur interest. Therefore, understanding how loans against whole life insurance policies function highlights the importance of managing borrowed amounts and their implications for the policy's benefits