Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceEasy
A life insurance policyowner has a $400,000 whole life policy with a cash value of $75,000. They decide to take a policy loan of $20,000. If the insured dies with the loan outstanding, what will be the approximate death benefit paid to the beneficiary?
- A$400,000
- B$20,000
- C$380,000
- D$325,000
Show answer & explanationAnswer & explanation
Correct answer: C. $380,000
When an insured dies with an outstanding policy loan, the loan amount (plus any accrued interest) is deducted from the death benefit before it is paid to the beneficiary. In this case, $400,000 (death benefit) - $20,000 (loan) = $380,000.
Why the other options are wrong
- A. The full death benefit is paid only if there are no outstanding loans.
- B. This is the loan amount, not the death benefit paid to the beneficiary.
- D. This amount would be incorrect as it implies a larger deduction than the loan amount.
Policy Loan Impact on Death Benefit
If a policyholder dies with an outstanding policy loan, the loan amount, plus any accrued interest, is deducted from the death benefit before it is paid to the beneficiary.
- Policy loans are taken against the cash value
- Interest accrues on the loan
- Loan does not need to be repaid during the insured's lifetime
- Outstanding loan (plus interest) reduces the death benefit
- Beneficiary receives the net death benefit
Memory trick: Loan outstanding? Death benefit's in the red.