What is a policy loan in the context of life insurance?

A policy loan refers specifically to a loan that a policyholder can take against the cash value of a permanent life insurance policy. This type of loan is distinct to permanent life insurance products such as whole life or universal life insurance, where a cash value component accumulates over time. When the policyholder needs funds, they can borrow from this cash value without needing to go through a standard lending process, thereby providing an accessible source of immediate cash.

The amount borrowed must be repaid with interest to keep the policy in good standing, and if the loan is not repaid, the outstanding amount plus accrued interest will be deducted from the death benefit payable to beneficiaries. This mechanism allows policyholders to leverage their insurance policy as a financial resource while still maintaining coverage.

Other options presented do not accurately reflect the function of a policy loan within life insurance: loans for general purposes (as mentioned in one option) are not specific to life insurance products, loans secured by assets outside life insurance refer to standard secured loans that do not involve insurance policies at all, and the notion that only whole life policyholders can access such loans is incorrect because certain types of universal life policies also offer cash value that can be borrowed against. Thus, the first option precisely encapsulates what a policy