What happens to a policy’s cash surrender value if a loan is taken against it?

When a loan is taken against a life insurance policy, the cash surrender value decreases by the amount of the loan. This is because the cash surrender value represents the amount the policyholder would receive if they chose to cancel or "surrender" the policy. When a loan is taken, the insurer uses the cash value as collateral for that loan, which reduces the amount left available to the policyholder if they were to surrender the policy at that moment.

As the outstanding loan amount is subtracted from the cash surrender value, any unpaid interest on the loan could further reduce this value if the policyholder does not manage the loan repayments effectively. Therefore, the correct understanding is that the cash surrender value decreases when a loan is borrowed against it. This principle is crucial for policy owners to understand, as it impacts their financial planning and the effective equity available in their policy.