South Carolina Life Insurance Practice Exam

Why are policy loans not available on term insurance?

1. Term insurance has a low premium

2. Term insurance has no cash value

3. Term insurance is only for death benefits

4. Term insurance is temporary

The correct answer is: Term insurance has no cash value

Policy loans are not available on term insurance because term insurance does not accumulate cash value. Unlike permanent insurance policies, which build cash value over time allowing policyholders to borrow against that value, term insurance is designed solely to provide death benefits for a specified period. Since term insurance only covers the insured for a limited time and does not incorporate an investment or savings component, there is no cash value accumulated from which the policyholder could take a loan. This characteristic of term insurance is one of the fundamental reasons why it is generally more affordable than permanent insurance, as it does not include the additional features that contribute to cash value growth over the life of the policy. Acknowledging this distinction in the structure of life insurance products is crucial for understanding why certain features, like policy loans, are linked to permanent policies rather than term ones.