How is the death benefit affected when a policy loan balance is outstanding?

• A. The death benefit is reduced by the loan balance plus accrued interest
• B. The death benefit is increased
• C. The death benefit is unaffected
• D. The policy becomes invalid until loan is repaid

Answer: (A)

When you borrow against a life insurance policy’s cash value, that loan is treated as a claim against the policy. At death, the insurer first deducts the outstanding loan balance and any accrued interest from the death benefit. The amount that goes to beneficiaries is the policy’s face amount minus the loan balance and interest. For example, if the face amount is 100,000 and there’s a 20,000 loan with 2,000 in interest, the payout would be 78,000. The policy can still be in force, but the loan reduces the amount paid out upon death.