If the insured dies with a loan outstanding, the death benefit is reduced by the loan amount.

• A. True
• B. False
• C. It is increased
• D. It is unaffected by the loan

Answer: (A)

When a life insurance policy has cash value that has been borrowed against, the loan reduces the payout at death. At death, the outstanding loan balance (plus any accrued interest) is subtracted from the death benefit before the beneficiary receives any proceeds. This is because the loan represents money owed to the insurer and must be repaid from the policy’s funds. For example, if the policy’s death benefit is $500,000 and there’s a $120,000 loan outstanding, the beneficiary would receive $380,000 (assuming no other adjustments). If the loan equals or exceeds the death benefit, the beneficiary could receive little or nothing, depending on the policy terms. Therefore, the statement is true.