If a policyowner borrows against the cash value of a life policy and the loan, with interest, is unpaid at the insured's death, the insurer will:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A policy loan is a loan from the insurer secured by the policy's cash value. If the loan and accrued interest are not repaid, they are deducted from the proceeds payable at death, or from the cash value at surrender. The policyowner may repay all or part of the loan at any time, and interest accrues on the outstanding balance. An unpaid loan therefore reduces the net amount the beneficiary receives. Policy loans are generally not taxable because they are borrowings, not distributions, but they reduce the death benefit and can even cause a policy to lapse if the loan exceeds the cash value.
Why the other options are wrong
- Policy loans are never forgiven; the outstanding balance must be repaid or it is deducted from the policy proceeds.
- A loan reduces the net death benefit; it never increases the face amount of the policy.
- The beneficiary receives the net proceeds after the deduction; no repayment obligation is placed on the beneficiary by the insurer.
Memory hook
Borrow from the policy and the death benefit comes up short by the loan plus interest.