South Carolina Life Insurance Practice Exam

If an insured requests a loan using their policy's cash value, what is typically true about the loan?

1. The policy lapses immediately

2. Interest is charged on the loan amount

3. The loan affects the death benefit negatively

4. Both B and C are true

The correct answer is: Both B and C are true

When an insured takes out a loan against their policy's cash value, it is generally true that interest is charged on the loan amount. This interest will accumulate over time and must be paid back to keep the loan from negatively impacting the policy. If the insured does not repay the loan plus interest, the outstanding amount will be deducted from the death benefit payable to beneficiaries upon the insured's passing. Additionally, the loan does have the potential to affect the death benefit negatively. If the insured passes away while the loan is still outstanding, the insurance company will subtract the loan amount and any accrued interest from the death benefit. This reduction ensures that the company only pays out the net value of the policy after considering the outstanding balance of the loan. Therefore, the combination of being charged interest and the impact on the death benefit confirms that both aspects are accurate responses concerning loans taken against a policy's cash value.