If life insurance is pledged as collateral for a loan, how much can be borrowed?

Question

Quizplus · Accepted Answer

If life insurance is pledged as collateral for a loan, the maximum amount that can be borrowed is usually the cash surrender value of the policy. This is because the cash value is the amount that would be paid out if the policy were surrendered, so it represents the amount of money that the lender could realistically expect to receive if they had to sell the policy to repay the loan. The face value of the policy represents the amount of the death benefit, which is not a guaranteed payout, so it is not an appropriate measure of the amount that can be borrowed. The annual premium is simply the cost of the policy and has no relation to the amount that can be borrowed. There is no universal rule that limits the amount that can be borrowed to 50% of the face value of the policy.

If Life Insurance Is Pledged as Collateral for a Loan