Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A client purchased a $500,000 whole life insurance policy 15 years ago. The policy has a cash value of $100,000. The client decides to take a policy loan of $20,000. If the client dies with the loan outstanding, and the interest on the loan has accumulated to $1,000, what will be the death benefit paid to the beneficiary?
- A$500,000
- B$479,000
- C$420,000
- D$480,000
Show answer & explanationAnswer & explanation
Correct answer: B. $479,000
When a policy loan is outstanding at the time of the insured's death, the loan amount plus any accumulated unpaid interest is deducted from the death benefit. So, $500,000 (face amount) - $20,000 (loan) - $1,000 (interest) = $479,000.
Why the other options are wrong
- A. The death benefit is reduced by the outstanding loan and interest.
- C. This option incorrectly subtracts the entire cash value, which is not directly deducted from the death benefit unless the policy is surrendered.
- D. This option only subtracts the loan, not the accumulated interest.
Policy Loan Impact on Death Benefit
If an outstanding loan (plus any unpaid accrued interest) exists on a life insurance policy at the time of the insured's death, the loan amount is deducted from the face amount of the policy before the death benefit is paid to the beneficiary.
- Loan + unpaid interest reduces death benefit.
- Cash value is collateral for the loan.
- Beneficiary receives net amount.
Memory trick: Loan taken, Benefit SHRUNKEN.