Final answer:
Borrowing against the cash value of a life insurance policy typically results in a decrease in the death benefit, although the cash value may continue to earn interest. The borrowed amount is not taxed, and the policy's premiums do not automatically increase.
Step-by-step explanation:
When a policy owner borrows against the cash value of his life insurance policy, several things can happen. However, the most accurate option provided in the question is that the policy's death benefit decreases. This happens because the loan amount is typically subtracted from the death benefit if the policyholder dies before repaying the loan. It is also important to note that, under most policies, the cash value continues to earn interest or dividends, which might partially offset the interest on the borrowed amount.
The borrowed amount is not subject to income tax as long as it does not exceed the premiums paid into the policy. Lastly, the policy's premiums do not necessarily increase to repay the loan; repayment of the loan plus interest is often flexible, but if it is not repaid, the unpaid loan amount and interest may reduce the death benefit.