Tennessee Insurance Practice Exam

Which statement is correct about a policy loan?

1. It does not accrue interest

2. Interest is waived for the first year

3. Past-due interest is added to the total debt

4. Loan amounts cannot exceed cash value

The correct answer is: Past-due interest is added to the total debt

A policy loan is a type of loan that a policyholder can take against their life insurance policy's cash value. When a policyholder borrows against their policy, the loan does accrue interest over time. If the interest is not paid when due, it accumulates and is added to the total amount owed, which is why the statement that past-due interest is added to the total debt is accurate. This means if the policyholder does not pay the interest owed on the loan, that unpaid interest will compound, increasing the overall loan balance that must be repaid in the future. This could potentially lead to a situation where the total amount owed exceeds the initial loan amount plus the interest accrued, especially if the loan remains unpaid over an extended period. Regarding the other statements, interest does accrue on a policy loan, typically from the beginning, which discounts the idea that it does not accrue interest or that interest is waived for the first year. Additionally, the total amount that can be borrowed is limited to the available cash value in the policy, making it incorrect to say that loan amounts cannot exceed cash value, as it is fundamentally true that loans usually are capped at the cash value minus any outstanding loans. Thus, the assertion that past-due interest