If a policyholder borrows against the cash value, what typically happens to the death benefit?

• A. Borrowing has no effect on the death benefit.
• B. Borrowing reduces the death benefit by the amount borrowed plus any interest.
• C. Borrowing increases the cash value.
• D. Borrowing terminates the policy.

Answer: (B)

When you borrow from the policy’s cash value, that loan becomes a debt against the policy. The death benefit payable to beneficiaries is reduced by the outstanding loan balance plus any accrued interest. So if you’ve borrowed money and not repaid it, the amount your beneficiaries receive at death will be the face amount minus what you owe (loan plus interest).

If you repay the loan, the death benefit can return toward its original level because the outstanding loan balance is decreased. If the loan balance plus interest ever equals or exceeds the death benefit, the payout could be reduced to zero.

The cash value portion is also affected because money borrowed is no longer part of the cash value until you repay. Borrowing does not increase the death benefit or terminate the policy by itself.