What is a "policy loan" in life insurance?

A policy loan refers to a loan that a policyholder can take against the cash value of a permanent life insurance policy. Permanent life insurance, such as whole or universal life policies, accumulates cash value over time that the policyowner can borrow against. The advantage of a policy loan is that it does not require a credit check and typically has lower interest rates compared to traditional loans.

The cash value of the policy serves as collateral for the loan, and the policyholder can usually borrow up to a certain percentage of this cash value. Additionally, if the policyholder does not repay the loan, the outstanding amount, including any interest, will be deducted from the death benefit payout to beneficiaries when the insured person passes away.

This understanding highlights the flexibility that a policy loan offers, as it provides access to funds while still maintaining a life insurance policy. The other options focus on aspects that either do not pertain to the definition of a policy loan or incorrectly associate it with other types of loans or insurance policies that lack a cash value component, such as term life insurance.