What happens when a policyowner fails to repay a life insurance loan?

When a policyowner fails to repay a life insurance loan, it has a permanent effect on cash value accumulation. This is because the unpaid loan amount, along with any accrued interest, will be deducted from the policy's death benefit and its cash value. Consequently, the policy's cash value will not accumulate at the same rate as it would have if the loan were repaid, ultimately reducing the overall value of the policy. If the unpaid loan plus interest exceeds the policy's cash value, there is a risk that the policy may lapse, meaning that it would no longer be in force.

The other options do not accurately reflect the implications of failing to repay a life insurance loan. For example, the cash value will not increase in the absence of loan repayment; it can actually decrease due to the outstanding loan. The notion that the policy would automatically renew is unrelated to the loan status. Lastly, the idea that the loan will be forgiven after one year does not align with standard life insurance practices, as loans taken against a policy must generally be repaid to maintain the policy's full benefits.