Which statement is TRUE regarding a policy loan?

The statement regarding policy loans that is true is that past-due interest on a policy loan is added to the total debt. This is an important aspect of how policy loans work in life insurance. When a policyholder takes out a loan against the cash value of their life insurance policy, any interest that accrues on that loan must be paid. If the interest isn't paid when due, it does not simply disappear; instead, it is added to the principal amount of the loan. This can lead to an increasing total debt owed to the insurer, as the compounded interest can cause the outstanding balance to grow over time.

This understanding is vital for policyholders as it affects the overall financial picture of the policy and can impact the death benefit available, especially if the loan plus accrued interest exceeds the cash surrender value. Being aware of this allows policyholders to make informed decisions regarding their loans.

The other statements do not accurately reflect the nature of policy loans. For instance, the interest rate on a policy loan is often variable rather than fixed, and there are no strict repayment timelines since the loan does not have to be repaid within one year. Additionally, policy loans are not tax-deductible, which differs from certain types of loans that may have deductibility