Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A client has a $300,000 whole life insurance policy with a cash value of $50,000. They decide to take a policy loan of $15,000. What impact does this loan have on the policy's death benefit if the insured dies before repaying the loan?
- AThe loan must be repaid by the beneficiary before receiving any death benefit.
- BThe death benefit is reduced by the outstanding loan amount, plus any unpaid interest.
- CThe death benefit remains $300,000, and the loan is forgiven.
- DThe policy will lapse immediately upon the loan being taken, canceling the death benefit.
Show answer & explanationAnswer & explanation
Correct answer: B. The death benefit is reduced by the outstanding loan amount, plus any unpaid interest.
If a policy loan is outstanding at the time of the insured's death, the loan amount, plus any accrued and unpaid interest, is deducted from the death benefit paid to the beneficiary.
Why the other options are wrong
- A. Incorrect; the beneficiary does not repay the loan; it is deducted from the death benefit.
- C. Incorrect; the loan is not forgiven; it reduces the death benefit.
- D. Incorrect; taking a loan does not automatically lapse the policy, as long as sufficient cash value remains to support it.
Policy Loan Impact on Death Benefit
If a policy loan, along with any accrued interest, is outstanding when the insured dies, the outstanding loan amount is subtracted from the death benefit paid to the beneficiary.
- Policy loans reduce the death benefit.
- Interest accrues on the loan.
- Loan repayment is optional during the insured's lifetime.
- Unpaid loans and interest are deducted from the death benefit.
Memory trick: A policy loan is like borrowing from your future self; if you don't pay it back, your heirs get less.