South Carolina Life Insurance Practice Exam

Which statement is not true regarding policy loans?

1. Loan amounts can exceed the cash value

2. Interest accumulates on unpaid loans

3. Repayment is optional while the insured is alive

4. Loans may affect death benefits

The correct answer is: Loan amounts can exceed the cash value

The statement about loan amounts exceeding the cash value is indeed not true regarding policy loans. In the context of life insurance policies, particularly whole life policies, the amount that can be borrowed, or the policy loan amount, is typically capped at the policy’s cash value. This ensures that the insurer's risk is managed effectively, as allowing loans to exceed the cash value could significantly undermine the policy's financial integrity and the insurance company's ability to cover claims. Interest does accumulate on any unpaid loans, which means that if a policyholder borrows against their cash value and does not repay the loan, the outstanding balance will grow due to accrued interest. This accumulation affects the policy over time and can have implications for the policyholder if they pass away before repaying the loan. Repayment of policy loans is generally optional while the insured is alive. This flexibility allows policyholders to manage their loans according to their financial situation. However, it’s important to note that any outstanding loans, plus interest, are deducted from the death benefit when the insured passes away. Lastly, loans can indeed affect the death benefits. If there is an outstanding loan at the time of the insured's death, the death benefit paid to beneficiaries will be reduced by the amount of the loan plus any