Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

In the case of loans taken against variable life insurance policies, what financial responsibility does the policyholder have?

1. They are liable for repayment with no interest

2. Interest is charged on the loan

3. They don't have to repay the loan

4. The loan amount becomes taxable

The correct answer is: Interest is charged on the loan

In the context of variable life insurance policies, when a policyholder takes out a loan against the cash value of the policy, they are indeed responsible for the repayment of the loan plus interest. The insurance company typically charges interest on these loans, which can vary based on the terms set by the insurance provider. This interest is usually computed on the outstanding loan balance and may be deducted from the cash value or the death benefit if not repaid. Understanding this responsibility is crucial for policyholders, as failing to repay the loan can have significant implications. If the outstanding loan amount plus any accrued interest exceeds the cash value of the policy, it can lead to policy lapse. Therefore, recognizing the financial obligation that comes with borrowing against a life insurance policy helps policyholders manage their policies effectively and avoid unintended consequences.