When are interest charges applied to policy loans?

Interest charges on policy loans are applied to replace lost investment income. When a policyholder takes a loan against their life insurance policy, they are effectively borrowing against the cash value of the policy. The insurance company could have invested that cash value elsewhere to earn a return. Therefore, the interest charged on the loan compensates the insurer for the potential income that is lost as a result of the money being lent out rather than invested.

This concept underscores the opportunity cost associated with taking out a policy loan. The charged interest helps maintain the financial integrity of the policy while also ensuring the insurer can manage its overall investment performance. Thus, the correct answer highlights the need to consider both the policyholder's borrowing and the insurer's financial perspective when it comes to policy loans.