How is the cash surrender value affected by policy loans?

The cash surrender value of a life insurance policy is directly influenced by any loans taken against it, particularly when those loans remain unpaid. When a policyholder borrows against the policy, the amount of the loan, along with any accrued interest, is deducted from the cash surrender value if not repaid. This means that if the policyholder has an outstanding loan, the cash surrender value will decrease by the total amount of the unpaid loan plus interest. As a result, when a policyholder decides to surrender the policy, they will receive a lower amount than they might expect due to these deductions, making it crucial to understand the implications of policy loans on the cash surrender value.

In contrast, other options either suggest that the cash surrender value increases with loans or remains unaffected, which does not accurately reflect the financial reality of how outstanding loans impact the value of the policy. The notion that cash surrender value is only influenced by the interest paid back does not consider the principal amounts of the loans themselves, which are also a key factor in determining the cash surrender value.