Life License Qualification Program (LLQP) Practice Exam

Which statement about a policy loan is TRUE?

1. Past-due interest payments not paid after 3 months will void the policy

2. Past-due interest on a policy loan is added to the total debt

3. Insurance companies can send delinquent interest accounts to a collection agency

4. Insurance companies can charge an interest rate based on the policyowner's credit report

The correct answer is: Past-due interest on a policy loan is added to the total debt

A policy loan allows a policyholder to borrow against the cash value of their life insurance policy. One significant aspect to understand is the treatment of past-due interest on these loans. When interest payments are not made on time, the insurance company adds the past-due interest to the total loan amount, which increases the overall debt that the policyholder owes. This accumulation can lead to larger repayment obligations and potentially affect the policy's cash value or death benefit if the total amount outstanding becomes significant. In contrast, other options discuss aspects that do not accurately reflect standard policy loan administration. While past-due interest can have serious implications, it does not directly invalidate a policy after three months, nor is there a standard practice for sending delinquent accounts to collection agencies or charging interest rates based on credit reports for these types of loans. Each of these other points diverges from the accepted norms of policy loans, making the true understanding of how interest is managed crucial for the policyholder.