AD Banker Comprehensive Practice Exam

What serves as collateral for a policy loan?

1. The cash value of the policy itself

2. The premiums applied to the cash value account minus the load

3. Not required at all

4. Provided by the policy's death benefit

The correct answer is: The cash value of the policy itself

A policy loan is a loan taken against the cash value of a permanent life insurance policy. The cash value accumulates as part of the policy and can be borrowed by the policyholder, effectively using the cash value as collateral for the loan. This means that the insurer has recourse to the cash value if the loan is not repaid, which secures the loan amount. While other options touch on relevant aspects of life insurance policies, they do not serve as collateral. The premiums referred to in one of the options contribute to building the cash value but do not constitute collateral in and of themselves. Additionally, it is essential to recognize that there is an obligation to repay policy loans; thus, collateral is indeed necessary, and a straightforward acknowledgment of that is found in the connection between the loan and the cash value. The death benefit is separate from the cash value and is not directly used as collateral for loans. Thus, the cash value of the policy itself is the correct and appropriate form of collateral for a policy loan within the framework of life insurance policies.