What is the sole collateral for a policy loan?

The correct answer is that the policy itself serves as the sole collateral for a policy loan. This means that when a policyholder takes out a loan against their life insurance policy, the insurer uses the cash value of that policy as collateral.

Life insurance policies, particularly whole life and universal life, build cash value over time, which can be borrowed against. The amount borrowed cannot exceed the cash value of the policy. If the loan is not repaid, any outstanding amount is deducted from the death benefit when the insured passes away. This arrangement demonstrates the intrinsic financial security built into life insurance policies, allowing policyholders to access funds while the policy remains in force, provided they maintain the premium payments.

Other options, such as the insurance company, the application form, and the insured's financial assets do not serve as collateral for a policy loan. The insurance company is the entity providing the loan but is not the collateral itself. The application form is a record of the insurance agreement and does not represent any financial value or collateral. Lastly, the insured's financial assets, while potentially relevant to the overall financial situation of the policyholder, are unrelated to the mechanics of policy loans, as only the policy's cash value is of concern.