Life License Qualification Program (LLQP) Practice Exam

What benefit does a policy loan provision typically offer to a policyowner?

1. Investing in the stock market

2. Tax-free access to cash value

3. Guaranteed coverage at all times

4. Increased policy premiums

The correct answer is: Tax-free access to cash value

The policy loan provision in life insurance policies typically allows the policyowner to borrow against the cash value of their policy. This is beneficial because it provides tax-free access to the accumulated cash value, enabling the policyowner to obtain funds without incurring immediate tax liabilities. When a policyowner takes out a loan against their policy's cash value, they are using their own money, which has already been taxed, to access funds. Therefore, as long as the loan and any accrued interest are repaid, there are no tax implications. This feature gives policyowners flexibility to address financial needs, such as unexpected expenses or investment opportunities, without having to surrender the policy or withdraw funds. Additionally, the cash value continues to grow as if the loan had not been taken, maintaining the policy's benefits. This contrasts with the other options: investing in the stock market does not directly correlate with a policy loan, guaranteed coverage typically requires consistent premium payments without loans affecting the policy, and increased policy premiums are not a characteristic or benefit of the loan provision.