What happens when a policyholder takes a "loan against cash value"?

When a policyholder takes a loan against the cash value of their life insurance policy, they are essentially borrowing money from the cash value that the policy has accumulated over time. This action directly affects future death benefits because the loan amount, plus any accrued interest, will be subtracted from the death benefit if the loan is not repaid. If the policyholder dies with an outstanding loan, the insurer will deduct the loan balance from the total death benefit paid to the beneficiaries. This is an essential aspect of how loans against cash value work, as it influences both the financial obligations of the policyholder and the benefits received by their beneficiaries.

The other options present misunderstandings of how loans against cash value function. For instance, a loan does not increase the death benefit; rather, it can decrease it if not repaid. Additionally, the loans are not unlimited and come with interest charges, contrary to the idea of being interest-free. Lastly, the nature of the loan does not inherently provide additional investments to the policyholder. Understanding these details clarifies why taking a loan against cash value specifically impacts future death benefits.