West Virginia State Life Insurance Practice Exam

A policy loan is made possible by which of these life insurance policy features?

1. Dividend provision

2. Cash value provision

3. Loan provision

4. Interest provision

The correct answer is: Cash value provision

The concept of a policy loan is fundamentally tied to the cash value provision of permanent life insurance policies. When policyholders have a whole life or universal life insurance policy, they accumulate cash value over time as they pay premiums. This cash value can serve as financial collateral, allowing policyholders to take out loans against the policy. When a policyholder takes a loan, they are essentially borrowing against the accumulated cash value, which remains untouchable by the insurer. The policy remains in force even as the loan is outstanding, and the loan does not require credit checks or lengthy approval processes, making it an accessible option for policyholders in need of funds. The cash value also grows tax-deferred, providing additional benefits, which makes this feature vital for understanding how policy loans operate within life insurance. This is why the cash value provision is correctly identified as the key feature that makes policy loans feasible.