Texas General Lines — Life, Accident, Health and HMOLife InsuranceMedium
An insured individual has a $250,000 life insurance policy. They decide to take a loan of $20,000 against the policy's cash value. If the insured dies before repaying the loan, and the outstanding loan balance plus accrued interest is $21,500, what will the beneficiary receive?
- A$230,000
- BThe full death benefit minus only the principal loan amount, so $230,000.
- C$228,500
- D$250,000 (full death benefit)
Show answer & explanationAnswer & explanation
Correct answer: C. $228,500
When a policy loan is outstanding at the time of the insured's death, the loan amount plus any accrued interest is deducted from the death benefit before it is paid to the beneficiary. In this case, $250,000 (death benefit) - $21,500 (loan + interest) = $228,500.
Why the other options are wrong
- A. This is incorrect; both the principal loan and the accrued interest are deducted.
- B. This is incorrect; both the principal and the accrued interest are deducted.
- D. This is incorrect; outstanding loans and interest are deducted from the death benefit.
Policy Loan at Death
If 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.
- Both principal and interest are deducted.
- Reduces the net death benefit.
- Loans are not taxable as income.
Memory trick: Loan at death? Deduction is the path.