What consequence may arise from failing to pay interest on a policy loan?

When a policyholder takes out a loan against the cash value of their permanent life insurance policy, they are typically required to pay interest on that loan. If the policyholder fails to pay the interest, several significant consequences can follow. One notable consequence is the potential refusal to issue future loans against the policy.

The insurance company may view the non-payment of interest as a risk factor. If there is an outstanding loan that is not being serviced, the company may become hesitant to approve additional loans against the policy. This is because the existing unpaid interest can accumulate and may even lead to a situation where the total loan amount exceeds the policy's cash value, resulting in the policy lapsing.

In this scenario, future loans can be considered a liability for the insurer, especially if they believe that the policyholder may not be able to repay any additional amounts. Therefore, the correct understanding of the implications of not paying interest on a policy loan highlights its direct effect on the homeowner's future borrowing capacity.