Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A life insurance policyowner has a $300,000 whole life policy with a cash value of $60,000. They decide to take a policy loan of $20,000. If the insured dies with the loan outstanding, and the accumulated interest on the loan is $1,000, what will be the net death benefit paid to the beneficiary?
- A$300,000
- B$280,000
- C$279,000
- D$270,000
Show answer & explanationAnswer & explanation
Correct answer: C. $279,000
When an insured dies with an outstanding policy loan, the loan amount plus any accumulated interest is deducted from the death benefit. In this case, the death benefit is $300,000. The outstanding loan is $20,000, and the interest is $1,000. Therefore, the net death benefit is $300,000 - $20,000 - $1,000 = $279,000.
Why the other options are wrong
- A. This would only be true if there were no outstanding loan or interest.
- B. This incorrectly deducts only the principal loan amount, forgetting the interest.
- D. This calculation is incorrect; it would imply a higher deduction than the actual loan plus interest.
Policy Loan Impact on Death Benefit
If an insured dies with an outstanding policy loan, the unpaid loan amount plus any accumulated interest is deducted from the death benefit paid to the beneficiary.
- Loan principal and interest reduce the death benefit
- Cash value is not directly reduced by the loan at death
- Beneficiary receives the net amount
Memory trick: Death benefit minus loan, minus interest, equals final payout. No free rides!