Final answer:
Loans taken out against cash-value life insurance policies do require interest payments and typically repayment, but if the insured passes away, the loan is paid out of the death benefit. These loans leverage the cash value within the insurance policy itself.
Step-by-step explanation:
One of the most attractive features of the loan values under permanent forms of life insurance is the fact that loans do not have to be repaid if the insured dies while the loan is outstanding. While it is true that cash-value (whole) life insurance policies accumulate cash that can be borrowed against, these loans are not interest-free and do typically require repayment. In the case of the insured's death, any outstanding loan amount, plus interest, is usually deducted from the death benefit paid out to beneficiaries. It is also important to understand that, unlike loans from banks, insurance policy loans do not require the insurance company to have significant extra funds since the money is essentially being loaned from the cash value that the policy owner has contributed to over time.