What happens to the cash value in a whole life policy if a loan is taken against it?

When a loan is taken against a whole life insurance policy, the death benefit is indeed reduced by the amount of the outstanding loan. Whole life policies accumulate a cash value over time, and policyholders have the option to borrow against this cash value. However, it’s important to understand that any unpaid loan plus interest that accumulates reduces the total death benefit that beneficiaries will receive when the insured passes away.

For instance, if a policyholder has a death benefit of $100,000 and takes out a loan of $15,000 against the cash value, the death benefit payable upon death would be reduced to $85,000 unless the loan is repaid. This is a critical aspect of understanding how loans affect the overall value of a whole life policy and the implications for the death benefit provided to the beneficiaries.

The other options are not accurate. Taking a loan does not instantaneously increase cash value, it actually utilizes part of it; there’s no automatic termination of the policy just because a loan is taken, as long as the policy remains in force and premium payments are maintained; and the assertion that the loan has no impact on cash value is also incorrect since the amount borrowed directly affects the overall cash value available and the death benefit.