Primerica Life Producer Practice Test

Which of the following is not true regarding policy loans?

1. They can be taken against the cash value

2. They are interest-free until repayment

3. Money borrowed from the cash value is taxable

4. Failure to repay can reduce the death benefit

The correct answer is: Money borrowed from the cash value is taxable

When discussing policy loans, it's important to understand how they operate within a life insurance policy that has a cash value component. The correct answer states that money borrowed from the cash value is taxable, which is not accurate in this context. Policy loans are typically taken against the cash value of a permanent life insurance policy, and the key aspect is that these loans are not considered taxable income as long as the policy remains in force. This means that if the policyholder takes a loan against the cash value and does not surrender the policy, they do not have to pay taxes on the amount borrowed. Taxes might be applicable only if the policy lapses with an outstanding loan or if cash value distributions exceed the premiums paid, but that scenario is not what the question or the provided statement is addressing directly. In contrast, the other statements about policy loans are accurate representations of how they function. They highlight that loans can indeed be taken against cash value, that they accrue interest during the time they are outstanding, and that failure to repay can result in a reduction of the death benefit, as the outstanding loan balance will be deducted from the benefit payable to beneficiaries. These clarifications help reinforce the understanding of how policy loans operate and the implications they hold for policyholders.