In a whole life policy, if a policy loan is taken, what is true about repayment?

• A. Policy loans are not allowed on whole life policies.
• B. Any outstanding loan reduces the death benefit but no interest is charged.
• C. Interest must be paid on the loan each month, even if no outstanding balance.
• D. The loan does not need to be repaid, but interest payments may be deferred for up to six months.

Answer: (D)

When you take a policy loan against a whole life policy, you’re borrowing from the cash value, not from the insurer’s funds. The important point is you don’t have to repay the loan on a set schedule; you can leave it outstanding. However, interest is charged on the loan balance and, over time, the loan and its accrued interest reduce the death benefit and the policy’s available cash value. Some policies allow you to defer paying that interest for a period, such as up to six months, rather than requiring immediate monthly interest payments. This combination—no mandatory principal repayment, with potential interest deferral—explains why the statement that the loan does not need to be repaid but interest payments may be deferred for up to six months is correct. If you don’t repay the loan or the interest, the balance grows and the death benefit is further reduced, and the policy could face trouble if value is exhausted.