What is an insurance "policy loan"?

A policy loan refers to the ability of a policyholder to borrow money against the cash value accumulated in their life insurance policy. When a policy has a cash value, the insurer allows the policyholder to take out a loan using that cash value as collateral. This is often a beneficial option because it does not require approval and generally has lower interest rates compared to traditional loans. However, it’s important for policyholders to understand that any unpaid loan amount, including interest, will be deducted from the death benefit if not repaid before the policyholder's death.

The other choices do not accurately represent what a policy loan is. A payment plan for premiums is related to how the policyholder pays for the insurance coverage and does not involve borrowing against the policy. A fee for processing the insurance application pertains to administrative costs rather than a loan mechanism. Lastly, a type of policy that pays out only after the policyholder's death describes a whole life or term policy but is not related to loans or cash values. Thus, the definition matched by the correct option highlights an essential feature of certain life insurance policies that allows for financial flexibility through loans against cash value.