If a policy loan is outstanding at the insured's death, what happens to the loan balance?

If a policy loan is outstanding at the insured's death, what happens to the loan balance?

• A. It is forgiven.
• B. It is deducted from the death benefit.
• C. It becomes a debt payable by the beneficiary after the death benefit.
• D. It is covered by the insurer separately from the death benefit.

Answer: (B)

When a policy loan is outstanding at death, the loan balance is deducted from the death benefit. A policy loan is a loan taken against the policy’s cash value, and interest can accumulate on that loan. At the insured’s death, the insurer first offsets the death benefit by the outstanding loan and any accrued interest, and only the remaining amount is paid to the beneficiary. The loan isn’t forgiven or paid as a separate debt by the insurer, and if the loan plus interest equals or exceeds the death benefit, the beneficiary may receive little or nothing and the policy could lapse. For example, if the death benefit is 200,000 and the outstanding loan plus interest is 60,000, the beneficiary would receive 140,000.

When a policy loan is outstanding at death, the loan balance is deducted from the death benefit. A policy loan is a loan taken against the policy’s cash value, and interest can accumulate on that loan. At the insured’s death, the insurer first offsets the death benefit by the outstanding loan and any accrued interest, and only the remaining amount is paid to the beneficiary. The loan isn’t forgiven or paid as a separate debt by the insurer, and if the loan plus interest equals or exceeds the death benefit, the beneficiary may receive little or nothing and the policy could lapse. For example, if the death benefit is 200,000 and the outstanding loan plus interest is 60,000, the beneficiary would receive 140,000.