Life & Health Insurance Exam (National Portion)Life InsuranceMedium
A policyowner has a $500,000 whole life insurance policy and decides to take a loan against its cash value. If the insured dies before repaying the loan, how will the death benefit be affected?
- AThe policy will be considered lapsed, and no death benefit will be paid.
- BThe death benefit will be reduced by the outstanding loan amount plus any accrued interest.
- CThe death benefit will be paid in full, and the insurer will pursue repayment from the estate.
- DThe beneficiary will receive a reduced death benefit, but the loan interest will be waived.
Show answer & explanationAnswer & explanation
Correct answer: B. The death benefit will be reduced by the outstanding loan amount plus any accrued interest.
When a policy loan is outstanding at the time of the insured's death, the loan amount plus any accrued interest is subtracted from the death benefit paid to the beneficiary.
Why the other options are wrong
- A. A loan does not automatically lapse the policy unless the loan amount exceeds the cash value and is not repaid after notification.
- C. Insurers typically deduct the loan from the death benefit, not pursue the estate separately.
- D. Accrued interest is almost always deducted along with the principal loan amount.
Life Insurance Policy Loan
A loan taken by the policyowner against the cash value of a permanent life insurance policy. If not repaid, it reduces the death benefit.
- Loan interest accrues
- Does not require credit check
- Reduces death benefit if outstanding at death
Memory trick: Taking a loan is like borrowing from your future death benefit; if you don't pay it back, the future payout shrinks.