Life & Health Insurance Exam (National Portion)Policy Provisions, Options, and RidersMedium
An insured has a whole life policy with a policy loan outstanding. If the insured dies before the loan is repaid, what effect will this have on the death benefit paid to the beneficiary?
- AThe death benefit will be reduced by the amount of the outstanding loan plus any accrued interest.
- BThe policy will be considered lapsed, and no death benefit will be paid.
- CThe insurer will convert the policy to a term policy and pay a reduced death benefit.
- DThe death benefit will be paid in full, and the beneficiary will be responsible for repaying the loan.
Show answer & explanationAnswer & explanation
Correct answer: A. The death benefit will be reduced by the amount of the outstanding loan plus any accrued interest.
When an insured with an outstanding policy loan dies, the insurer will subtract the amount of the loan, plus any accrued and unpaid interest, from the death benefit before paying the remainder to the beneficiary.
Why the other options are wrong
- B. A policy loan does not typically cause a policy to lapse unless the loan amount exceeds the cash value and is not repaid.
- C. The policy type does not change due to an outstanding loan; the death benefit is simply adjusted.
- D. The policy loan is a debt against the policy's cash value, not a separate personal debt for the beneficiary.
Policy Loan Effect on Death Benefit
Any outstanding policy loan, plus accrued interest, is deducted from the death benefit when the insured dies.
- Loan is against cash value
- Reduces beneficiary payout
- Interest accrues on loan
Memory trick: LOAN OUT, DEATH BENEFIT DOWN