Which of the following is correct about policy loans in life insurance?

When it comes to policy loans in life insurance, it is important to understand how they impact the policy itself, particularly in relation to the death benefit.

When a policyholder takes out a loan against the cash value of their life insurance policy, it creates a liability that must be managed. If the loan is not repaid, the amount borrowed, plus any accrued interest, will be deducted from the death benefit paid to beneficiaries upon the insured’s death. This means that the death benefit can be significantly reduced, which is why this option is correct. It emphasizes the importance of understanding how policy loans can affect the financial protection intended for loved ones.

The other options do not accurately reflect the nature of policy loans. Policy loans typically incur interest, meaning they are not interest-free. While it is advisable to pay back policy loans to maintain the policy's value and intended benefits, it is not strictly required to keep the policy in force. Additionally, policy loans generally have limitations in terms of the maximum amount that can be borrowed, often defined by the cash value of the policy, thus negating the notion that they can be taken without any limitations. Understanding these nuances helps ensure informed decision-making regarding life insurance policy loans.