Final answer:
Whole life insurance allows policy-owners to borrow against the accumulated cash value of their policy, while term life insurance does not offer this feature. Variable and universal life insurance policies may also have similar capabilities.
Step-by-step explanation:
The type of life insurance policy that allows a policy-owner to take out a loan from the policy's cash value is a whole life insurance policy. Whole life insurance, also known as cash-value life insurance, provides a death benefit to beneficiaries and accumulates a cash value over time that the policy-owner can borrow against. This feature is not available in term life insurance, which does not accumulate cash value and only provides coverage for a specified term. Variable life insurance and universal life insurance may also offer cash value components that allow for policy loans, but whole life insurance is the most straightforward policy with this feature.
An insurance premium is the amount of money that an individual or business must pay for an insurance policy. Policyholders of whole life insurance contribute to their policy's cash value through their paid premiums, which can later serve as a source for a loan. It is important to remember that the loan must be paid back with interest; otherwise, the death benefit may be reduced.