Massachusetts Life Producer Practice Exam

If a life insurance policyowner fails to pay the interest on their policy loan, what is the consequence?

1. The policy is automatically lapsed.

2. The death benefit is increased.

3. The loan amount is increased to reflect the amount of interest due.

4. The policy will receive a premium holiday.

The correct answer is: The loan amount is increased to reflect the amount of interest due.

When a policyowner takes out a loan against their life insurance policy, they are typically required to pay interest on that loan. If the policyowner fails to pay the interest due, the consequence is that the loan amount will be increased to reflect the amount of interest that is owed. This essentially means that the interest is added to the outstanding loan balance, which can lead to a larger amount being deducted from the policy's death benefit or cash value if the loan is not repaid. This mechanism allows the insurance company to ensure that they are compensated for the borrowed funds while still maintaining the policy in force. If the interest is not paid, it accumulates and compounds, which can significantly increase the total debt against the policy over time. The other consequences mentioned are not accurate in this context. For instance, the policy does not automatically lapse unless the total loan balance becomes so high that it exceeds the cash value, and it certainly does not increase the death benefit or provide a premium holiday as a result of unpaid interest. Thus, the correct understanding is that the loan amount rises to include the owed interest, reflecting the ongoing obligation of the policyowner.