A policyowner borrows money from the insurer using the cash value of a whole life...

A policy loan is a loan made by the insurer to the policyowner and secured by the policy’s available cash value. It is not a withdrawal that automatically terminates the coverage. However, the outstanding principal and accrued interest become indebtedness against the policy. If the insured dies before repayment, the insurer deducts that indebtedness from the amount otherwise payable to the beneficiary. Therefore, the usual result is a reduced death benefit.

This concept is especially important with permanent life insurance, including whole life and certain universal-life policies, because cash value may support policy loans. Interest continues to accrue under the policy’s loan provision. If the debt becomes large enough, it can threaten the policy’s continuation because a lapse may occur if the cash value is insufficient to support the indebtedness and required charges. A producer should explain both the availability of loans and their consequences; presenting a loan as “free money” would be misleading.

Nevada’s life-insurance standards require a loan provision in policies to which the requirement applies. The contractual terms control such matters as interest, notice, repayment, and the effect of indebtedness on policy values and proceeds.

References/topics from the Study Guide: Cash Value; Policy Loans; Nonforfeiture Values; NRS 688A.110—Loan Secured by Policy.

===============