A loan against cash value reduces the death benefit by the amount of the loan.

• A. True
• B. False
• C. Only if the loan exceeds cash value
• D. Only in non-variable policies

Answer: (A)

A loan taken against the policy’s cash value creates a debt on the policy. Any outstanding loan balance (plus accrued interest) is subtracted from the death benefit when the insured dies. So the death benefit payable to beneficiaries is the face amount minus the loan balance. If the loan is repaid, the full death benefit can be preserved; if not, the benefit is reduced accordingly, and in extreme cases the policy could lapse if the loan far exceeds the death benefit. This behavior is typical for permanent life policies with cash value, not for term policies without cash value. Therefore, the statement is true.