What is policy loan interest rate?

• A. It is the rate charged by the insurer on borrowed cash value; unpaid interest and principal reduce the death benefit.
• B. It is the rate the insured pays on loans from the bank.
• C. It increases the cash value.
• D. It is always 0% for all policies.

Answer: (A)

The policy loan interest rate is the rate charged by the insurer on a loan taken against the policy’s cash value. When you borrow from the policy, you’re getting a loan against that cash value, and interest accrues at this rate. If the loan isn’t repaid, the unpaid interest increases the loan balance, and the death benefit payable at death is reduced by the outstanding loan (including accrued interest). The cash value itself is also drawn down as the loan is taken and as interest accrues. This isn’t a bank loan, it doesn’t increase the cash value, and it isn’t always 0% for all policies.