What is the purpose of a policy loan?

The purpose of a policy loan is to provide policyholders with the ability to borrow against the cash value of their life insurance policy. This feature is particularly beneficial for those who have accumulated a cash value component within a whole life or universal life insurance policy. By taking a policy loan, the policyholder can access funds for various needs—such as emergencies, investments, or personal expenses—without going through a traditional loan approval process or incurring taxation on the borrowed amount, as long as the loan is repaid within the terms set by the insurer.

This mechanism allows policyholders to leverage the monetary value that has built up in their policy while retaining the death benefit and continuing coverage. Importantly, the outstanding loan balance, along with accrued interest, will reduce the death benefit if not repaid, which is a crucial factor for policyholders to consider when utilizing this option.

In this context, other options do not accurately represent the function of a policy loan. For instance, paying off existing debts is not a direct purpose of a policy loan, although the funds could be used for such. Increasing the overall face value of the policy is not feasible through a loan since the face value remains fixed unless additional premiums are paid for a larger policy. Covering premiums