Arizona Life and Health Practice Exam

What is considered the collateral on a life insurance policy loan?

1. The policy's death benefit

2. The policy's cash value

3. The premium payments made

4. The policy's accrued interest

The correct answer is: The policy's cash value

The collateral on a life insurance policy loan is the policy's cash value. When a policyholder takes out a loan against their life insurance policy, they are essentially borrowing against the cash value that has built up over time within the policy. The insurer considers this cash value as security for the loan, meaning that if the policyholder defaults on the loan, the insurer has the right to recover the outstanding amount from the cash value. In contrast, the death benefit represents the total amount payable to beneficiaries upon the insured's death but does not serve as collateral for the loan. Premium payments made do not contribute to collateral for the loan; they fund the policy but are not accessible as collateral. Similarly, accrued interest is a cost associated with the loan and does not provide any collateral value itself. Thus, the cash value is the significant asset that can be used as collateral for the loan.