Question

One of your clients owns a permanent life insurance policy. He needs cash. He knows that he can cash surrender the policy but he doesn't want to lose his life insurance protection. He asks you about how a policy loan works. You should tell him all of the following EXCEPT:[A] The loan will have to be paid back with interest.[B] Outstanding policy loans that are unpaid at death will be subtracted from the policy proceeds.[C] The loan amount is not subject to federal income taxes.[D] The amount that the policyholder can borrow is generally limited to 50% of the cash surrender value.

Answer 1

Answer:

D) The amount that the policyholder can borrow is generally limited to 50% of the cash surrender value.

Explanation:

Policy loans can generally amount up to 100% of the cash surrender value of the permanent policy. This type of loan is fully collateralized by the cash value of the policy and the borrower can even miss some payments or pay on a later date because interests keep adding. There is no risk involved for the insurance company. It is something similar as taking a loan using a CD as collateral, the bank is fully covered and there is no risk.