If a policy loan is outstanding at death, how is the death benefit typically affected?

If a policy loan is outstanding at death, how is the death benefit typically affected?

• A. It is reduced by the loan amount and any accrued interest
• B. It remains the full face amount regardless of the loan
• C. It increases to offset the loan
• D. The loan is paid by the estate separately

Answer: (A)

When a life insurance policy has an outstanding loan at the time of the insured’s death, the death benefit is reduced by the loan balance plus any accrued interest. The loan is treated as a debt against the policy’s cash value, so the insurer deducts that amount from the stated death benefit paid to beneficiaries. For example, if the policy’s face amount is $100,000 and there’s a $20,000 loan with $2,000 in interest, the death benefit paid would typically be $78,000. Interest on the loan can continue to accrue, so the balance may grow over time. The loan isn’t usually paid separately by the estate from other funds; the death benefit is reduced to satisfy the outstanding loan.

When a life insurance policy has an outstanding loan at the time of the insured’s death, the death benefit is reduced by the loan balance plus any accrued interest. The loan is treated as a debt against the policy’s cash value, so the insurer deducts that amount from the stated death benefit paid to beneficiaries. For example, if the policy’s face amount is $100,000 and there’s a $20,000 loan with $2,000 in interest, the death benefit paid would typically be $78,000. Interest on the loan can continue to accrue, so the balance may grow over time. The loan isn’t usually paid separately by the estate from other funds; the death benefit is reduced to satisfy the outstanding loan.