Texas General Lines — Life, Accident, Health and HMOTexas Statutes and Rules Specific to Life InsuranceMedium
An insurance agent in Texas is explaining the policy loan provision of a whole life insurance policy to a client. Which of the following statements about policy loans is accurate under Texas law?
- AIf an insured dies with an outstanding loan, the beneficiary receives the full death benefit, and the insurer pursues the estate for repayment.
- BThe policy loan value cannot exceed the policy's cash surrender value.
- CPolicy loans can only be taken after the policy has been in force for at least five years.
- DThe interest rate on policy loans is fixed at 6% annually, as mandated by the state.
Show answer & explanationAnswer & explanation
Correct answer: B. The policy loan value cannot exceed the policy's cash surrender value.
Policy loans are secured by the policy's cash value, meaning the loan amount cannot exceed the available cash surrender value. If the insured dies with an outstanding loan, the loan amount plus accrued interest is deducted from the death benefit.
Why the other options are wrong
- A. This is incorrect. Any outstanding policy loan, plus accrued interest, is deducted from the death benefit paid to the beneficiary, not pursued separately from the estate.
- C. Policy loans are typically available once a cash value has accumulated, which is usually after 2-3 years, not necessarily five.
- D. Interest rates on policy loans can be fixed or variable, but they are not universally fixed at 6% by state mandate; they can fluctuate or be tied to an index.
Policy Loan Provision (Texas Life Insurance)
A provision in whole life policies allowing the policyholder to borrow against the policy's cash value. The loan amount cannot exceed the cash surrender value and is repaid with interest, or deducted from the death benefit.
- Available once cash value accumulates.
- Loan amount cannot exceed cash surrender value.
- Interest is charged on the loan.
- Outstanding loans reduce the death benefit.
Memory trick: Cash value is your collateral, don't forget the interest call.